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Line of Credit: Everything You Need to Know Research Team | Posted On Thursday, September 19,2019, 05:53 PM

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Line of Credit: Everything You Need to Know



There are several ways to borrow money. You may go to a bank for a conventional variable-rate or fixed-rate mortgage, borrow funds from relatives and friends, make use of credit cards or avail mortgages from local financiers. How about a line of credit? Yes, a line of credit, abbreviated as LOC, is one of the lesser-known ways of borrowing funds. Lines of credit are commonly used by business entities to fund their working capital requirements or benefit from strategic funding opportunities.

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Line of Credit Meaning

A line of credit, also referred to as a personal line of credit or bank line, is an account that may be opened by individual customers, business enterprises and even governments with banks or other financial institutions.Lines of credit are offered in several forms, including term loans, demand loans, overdrafts and purchase of commercial bills. The issuers of LOC permit their customers to borrow funds up to a given limit. Borrowers pay interest on the money they borrow. As they start repaying the loan, the credit limit shall be reloaded.

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How does line of credit work?

Lines of credit (LOCs) work in a similar way to credit cards. Both options impose a borrowing limit and interest rates.LOCs are more advantageous than credit cards. It is because the interest rates on credit cards are higher than the interest rates on LOC. Moreover, the credit limit for LOC is higher than the credit limit for credit cards. The borrowers of LOC also get a monthly statement stating their account balance, the minimum payment due and the summary of fees and interests. They have a draw period, which is the period during which the funds are borrowed; and a repayment period, which is the period during which the interest and principal are repaid.

Lines of credit in India

In India, LOCs are broadly categorized into two categories, which include 1) secured lines of credit and 2) unsecured lines of credit. The borrowers need to pledge something valuable to be able to avail secured LOCs, while the banks issue unsecured LOCs only on the basis of the earning potential and credit score of the borrowers. How to apply for an LOC in India? The process is very simple.All you have to do is approach the bank of your choice with the following documents:

  • Income proof
  • Address proof
  • Employment proof
  • Age proof
  • Bank statements for the 6 months
  • PAN card

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Citi Bank, which is a renowned private sector bank; and Bajaj Finserv, which is a popular NBFC; are the leading providers of LOCs in India.Via offering LOCs, Citi Bank helps its customers renovate their homes, meet medical emergencies and pay for unexpected expenses and children’s education. The bank fixes the interest rate based on the loan amount and the funds can be accessed online. The loan repayment tenure offered by Bajaj Finserv is flexible and ranges from 2-5 years. LOCs may also be obtained via Money Tap from Rs.30,000 to Rs.5 lakh.

LOCs by Exim Bank

The export and import bank of India, abbreviated as EXIM Bank, has been extending its Lines of credit to enable the exporters of India to expand their business or capture new localities with no payment risk from transnational importers. The bank also extends this facility to sovereign governments, regional development financial institutions and transnational financial institutions. Even the Government of India supports this style of financing.

Personal line of credit

A personal line of credit is just like a credit card. The whole amount is approved by banks at once and the interest is paid on the actual money borrowed. It is useful when people need to borrow funds incrementally and enables them avoid overdrawing their checking accounts. No collateral is required. It is completely based on the credit history of consumers.

Line of credit – home equity

A home equity line of credit (HELOC) is a mortgage in which the financier permits to lend a maximum amount within a predefined timeline. It is a line of credit secured by the home of a borrower. A HELOC is completely different from a home equity loan. In case of a home equity loan, customers get a lump sum all at once. On the other hand, a HELOC gives a line of credit, which is available for a defined timeframe. People use HELOCs for renovating homes majorly. HELOCs have lower upfront expenses and interest rates as compared to credit cards and home equity loans.

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Revolving line of credit

A revolving line of credit is a loan category provided by financial institutions. In other words, it is a type of credit that may be utilized repeatedly up to a predetermined limit. Borrowers can repay the debts periodically and borrow again once the debts are repaid. Normally, revolving lines of credit are used for operating purposes. Based on the current cash flow requirements of customers, the loan amount withdrawn may vary every month.

Business line of credit

A business line of credit is a revolving mortgage that permits access to a certain quantum of capital that may be used to meet short-term business requirements such as purchasing stocks, financing marketing campaigns, repairing business-critical machines or equipment, bridging a seasonal cash flow gap, etc. It does provide the flexibility that a normal business mortgage does not.

Line of credit vs loan

Both lines of credit and loans/mortgages allow consumers and business enterprises to borrow funds for various purposes. The common examples of LOCs and loans include credit cards, home equity lines of credit and vehicle loans. The primary difference between mortgages and LOCs is how borrowers get the funds and repay the debts.

Line of credit example

Let’s assume that you have a Rs.20 lakh line of credit from a particular bank. If you draw just Rs.5 lakh out of this pre-determined line of credit, the interest is levied only on the actual amount you have withdrawn, which is Rs.5 lakh. Once you repay the debt, the credit limit is reloaded again.

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