Personal Line of Credit

If you are in urgent need of finance, think beyond credit cards and personal loans.  Whether you’ve small expenses or larger ones, a line of credit gives you money on demand. It is usually sanctioned by banks and credit unions to existing customers who meet the eligibility norms.

What is personal line of credit?

A personal line of credit is like a loan. It is an agreement between you and the lender. The lender agrees to lend an amount, subject to an upper limit. You can withdraw funds any time, subject to the maximum limit.

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Things to know on personal line of credit

1. Interest:

Interest is charged only on the amount borrowed and not on the maximum amount allowed. The rate of interest on a personal line of credit varies across banks.

2. Associated costs:

• Application fees: Not all lenders charge for the application. It is good to double-check.
• Annual fees:  This fee is charged each year as long as you have the account open. Some banks may waive annual fees.
• Cash advance fees: This fee is at the discretion of the lender. It is charged each time you withdraw funds from the personal line of credit.

3. Credit limit: Credit limit is the maximum amount that can be withdrawn. This limit varies across banks.

4. Unsecured personal line of credit:

An unsecured personal line of credit doesn’t require security or collateral. Compared to a secured personal line of credit, an unsecured personal line of credit usually has a higher interest rate.

5. Secured personal line of credit:

A secured personal line of credit requires collateral. The security can be savings account balance or certificate of deposit and so on. As a secured personal line of credit is secured against collateral, it has a lower rate of interest.

In case you fail to repay, collateral will be withheld. You may lose access to collateral, till repayment.

6. Purpose:

Money drawn from a personal line of credit can be used for any purpose.

7. Eligibility criteria:

The eligibility criteria to avail a personal credit of line differ across banks.

How does a personal line of credit work?

• If you are eligible to avail a line of credit, you will be allotted a maximum amount that can be drawn within a certain time.
• The interest is charged only on the borrowed amount.
• If you repay the borrowed funds in time, you can again borrow from the line of credit.
• As long as you pay off what you borrow on time and in full, and stick to the terms and conditions, you can keep on borrowing.
• A good credit history can get you the best interest rates. You can also avoid collateral.

Who can avail a personal line of credit?

Banks  offer a personal line of credit to high net-worth clients. To avail a line of credit, a decent credit score is a must. You must have a sizeable amount of money in your bank account.

Alternatives to a personal line of credit:

1. Personal loan:

A personal loan is a short-term loan availed to meet financial emergencies. They are also called emergency loans. The repayment tenure of a personal loan is short which is around 1-5 years.

A personal loan is an unsecured loan. So, banks charge a higher rate of interest on these loans than most other loans.

See Also: Things To Consider Before Availing Personal Loans

2. Credit card:

A credit card is plastic money which enables you to borrow. A credit card is issued on a condition that you repay the borrowed amount plus interest, and any other charges that were agreed upon. The borrowing limit of a credit card differs across individuals. It is ascertained taking into consideration, credit rating.

What is the right move for your finances?

This totally depends on you. You must weigh the pros and cons of each type of credit available and go for the one that suits you best.

 

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