Line of Credit Finance

What is Line of Credit Finance?


Borrowing money can be both simple as well as a complicated task depending on the source. While borrowing money from a friend or a relative may be easy, opting for a loan from a standardized lending authority can sometimes be a tedious task.

The characteristics of money lending and borrowing have evolved over the years. Nowadays, there are many governments authorized institutions that cater to money lending. This has been a popular support system for businesses.

Several business owners consider acquiring significant capital to build their business or further expand their growth. There are various options available for borrowing money today. One of the most primitive ones is borrowing from a friend/relative and the most popular one being that of a business loan.

There is, however, a third hidden gem for borrowing money and utilizing it as per the desire of the borrower. This gem is the line of credit finance, a strategy to extract capital either for business purposes or for personal use.

Line of Credit Finance: The key to ensure a long-term capital resource

Line of Credit loan is a mystery to most business owners and other professionals. It is often confused with a credit card, a business loan, or a personal loan. But it is none of those.

Line of Credit finance or a Line of Credit loan is essentially a form of agreement between the lender and the borrower regarding a specific amount of money or capital that the borrower can utilize any time they want. Such an agreement typically occurs between a business owner/working professional and a lending authority such as a bank where the bank allows the individual to make withdrawals from a specified fund at any time.

Line of Credit finance is a type of flexible loan where the borrower can take up funds at any point in time. There is no limit. After utilizing the complete funds, the individual can either choose to return those all at once, or he/she can repay the loan amount over some time. As is the case with any other loans, a line of credit loan also charges a rate of interest as soon as the individual utilizes the funds.

To an inexperienced individual or an individual new to the realm of loans, this line of credit finance might sound familiar to a normal loan. It may also look the same as getting a credit card for your expenses. So, how are these concepts different from a line of credit loan?

Credit card vs Line of Credit loan

While a credit card’s broad working mechanisms and line of credit finance may seem similar, the underlying terms and conditions are a little different. 

Both credit card and line of credit loans allow the individual to utilize a specific fund as and when required and deposit the amount due after borrowing the money. There are variable consequences upon extending the limit of the funds that depend on the lending authority.

The difference between the two is that the individual can avail of a line of credit loan by using a property. This means that an individual can use an actual property as collateral in exchange for some monetary funds. This is not the case with credit cards. This concept is not incorporated while sanctioning a credit card to an individual.

Another dissimilarity between the credit card and line of credit finance is that credit card companies always impose a minimum monthly payment or interest charges on the individual. On the other hand, the line of credit finances does not impose such a monthly charge on the individual. This may vary with the type of lending authority offering a line of credit finance. The bottom line query here is

What is a good choice between a line of credit and a credit card loan?

The line of credit is a much more beneficial finance option as compared to the credit card loan. Credit card loans often impose higher interest rates on their users as well as require a minimum monthly fee from the individual for using credit cards. Line of credit, on the other hand, is cost-effective and offers a lower interest rate.

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Personal loan vs Line of Credit loan

Many people also confuse a personal loan and a line of credit loan to be the same. This is common because, upon first sight, the concept of both these loans appear to be similar, i.e., lending of a specified fund to an individual that has to be returned in a certain time and charged with interest rates. But there is more to these loans than what meets the eye.

A personal loan is typically useful when an individual is planning to make a significant purchase or invest a large amount at one time. It is suitable for a large one-time capital requirement that can be paid back in due course of time.

However, a line of credit loan is useful in assisting time-to-time payments and capital requirements of the individual. With such a loan, the individual does not have to worry about long-term financial needs and compensate for on-going purchases without hesitation.

FeaturePersonal loanLine of credit loan
Type of loan disbursementLump-sum at a single timeThe personal credit can be utilized at any point by the individual.
Rate of interestMay be fixed or variable depending on the lending authority. It is typically fixed.The interest rates are generally variable.
Amount of loan sanctioned.The maximum loan amount can go up to 40 Lakh.The capital that can be borrowed ranges from Rs.30,000 to Rs 5 lakh
Repayment of loanHere the individual pays the total amount of the loan that involves the principal amount along with the interest rate.

The individual may choose to pay the amount on a monthly or annual basis.

Under such a loan, the individual has to repay interest charged on the borrowed sum and not the full credit. The individual can make the complete payment at once or break down the payment over periods.
Collateral Such loans may be availed either as secured or unsecured loans. The individual may choose to provide property as collateral in exchange for capital.These loans also can be either secure or unsecured.
Flexibility in loanThere is comparatively less flexibility under such loans regarding repayment and interest rates.These loans offer more flexibility for loan repayment and interest rate options.
Means of availing of the loanPersonal loans involve a specified cause for the utilization of funds provided to an individual, such as purchasing property, building a house or buying a car, etc.A line of credit loan does not require any such specifications. The individual/borrower has free will to utilize the funds whenever and wherever they want.

Deciding among both these loan alternatives may seem a bit daunting right now, so let us clarify with an example:

Suppose you are looking to buy a house. Should I go for a line of credit or a personal loan?

In this case, the line of credit will not prove to be fruitful in helping the individual with a large purchase. It is because the interest rates on such loans are much higher, and they also prove to be more expensive than a personal loan. The personal loan is beneficial for large one-time purchases where the individual has to pay a huge amount at one go, such as buying a property or a vehicle.

Advantages of using a Line of Credit Loan:

As a Line of Credit loan has a significant difference from the credit cards, personal loans, and payday/pawn loans, it is bound to have a certain edge above such loans too. It includes:

  • A line of credit loan has a lower risk margin when compared with a credit card loan. The higher interest rates and uncertain monthly dues of a credit card loan make it a cumbersome option for the borrower.
  • The Line of credit loans also serves a dual purpose where they allow the individual to enjoy the benefits of capital funds along with the freedom to utilize those funds at any time they want. This does not happen under a personal loan where the individual has to utilize the funds within a specific time.
  • With a line of credit finance, there is no need for the individual to borrow money again and again to meet his/her financial needs. They can simply withdraw the amount they require anytime. 
  • These loans help ensure a steady state of cashflow for the individual that can go as a long-term capital resource.
  • The personal loans are usually limited to those purchases that are underwritten by the bank and its policies. A line of credit loan, on the other hand, allows a person to purchase those items that are excluded from bank policies.
  • Line of credit loans helps in maintaining the ‘working capital’ of a business.
  • With a line of credit finance, the individual can time the monthly payment or regular cash outflows more efficiently.
  • In case an individual has an unstable income, a line of credit helps in easier capital assistance.
  • The individual’s line of credit may also be used under a bank overdraft protection plan.

Things to consider before applying for a Line of credit loan:

Before you go ahead and apply for a line of credit loan, it is important to set some facts straight:

Line of credit, credit score, and everything in between:

Before applying for a line of credit loan, a viable point to ponder upon that the lending authorities take into account the credit score of the individual. While the required credit score may vary from one bank to another, the general consensus is that a credit score of 700 and above is considered good for acquiring a credit line.

No more hesitation in applying for a line of credit finance:

The application procedure for a line of credit is much more flexible as compared to other loans. There are no strict eligibility criteria for acquiring such a loan, and the selection criteria are majorly dependent on individuals’ credit score.

Methods of applying for a line of credit loan in India:

You can choose to apply online and offline. You can apply offline by visiting the lending authority’s office or applying online by filling out the loan application form available on the official company website. Other NBFCs such as Lending kart provide assistance in online loan application and loan repayment facility.

Hop on to Lending kart’s website to start a line of credit today. 

Inter-relationship between the lender and the line of credit:

Certain underlying mechanisms work between the lender and the financing.

Like if the lending authority is a Bank, then there may be the withdrawal of funds from the borrower’s bank account in line with credit loans. This happens under a scenario where the individual fails to repay the credit amount, or he/she opts for limited periodic withdrawals.

An added point to remember here is that planning out the use and investment of the line of credit well in advance of withdrawing the funds shall help the individual in a much better financial planning and credit return in a planned manner.

In conclusion, a Line of Credit loan is similar to the financial aspects of any business. When used smartly, it can assure good results, and if not, then they may result in some damage. That is why it is good to pay attention to the terms of the line of credit policies to save one from financial trouble. When dealt with correctly, the line of credit loan can be lucrative financial assistance that dispenses the need for another capital resource.

Thinking where to get your line of credit loan from?

Lending kart provides some of the topmost lines of credit loans, which can prove to be a better financial solution for you and for your business. You can apply for a line of credit loan online today and find the right assistance at Lending kart.

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