10 Things You Need to Know About Line of Credit - MoneyTap Blog
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10 Things You Need to Know About Line of Credit

Line of Credit is a popular credit instrument because it is flexible, can be easily availed and works on a better interest rate than a credit card. Whether it is for a business expense or a personal expense, a number of banks, financial institutions and alternative lenders like Peer to Peer lenders easily offer this revolving credit mechanism as an option for borrowers. However, while it may seem like a breeze, it is after all a type of loan itself. It also needs to be repaid with interest. Hence, it is important to look into the some details before investing in any credit instrument.

10 Things to Know About Line of Credit

1. How Does Credit Line Interest Work?

A line of credit is a continuous revolving credit account from which you can withdraw funds as and when you like. When you approach a lender for a line of credit account, you get into an agreement with the lender, outlining the terms of lending. This generally depends on various factors such as your creditworthiness, relationship with the lender etc. Some important considerations that are outlined are the maximum threshold limit up to which you can borrow, and a minimum monthly payment to be made every month.

2. Interest Chargeable

What makes a line of credit attractive is that unlike a regular loan, you don’t start paying interest charges until you decide to use it. This proves to be quite a cost advantage, unlike normal loans which charge interest on the loan amount, rather than the loan utilisation. The purpose for credit is to gain quick and easy credit at a decent interest rate.

3. What is a Line of Credit Used For

A credit line can be used for business as well as personal purposes. A personal line of credit is typically used for meeting expenses of an urgent and immediate nature or long-drawn expenses, such as a sudden financial need or a family function. A business line of credit can be used for funding your business expenses, often of an ongoing nature, such as working capital requirements, wage payments, purchase of raw materials and inventory etc.

4. Why Get a Credit Line

Line of credit offers the advantage of lesser loan costs, flexibility, continuous funds, and often a higher account limit.

5. Line of Credit Requirements

While the basic documentation required for a line of credit is more or less the same as a loan, credit line requirements depend upon whether you are opting for a secured line of credit or an unsecured line of credit.  

6. How to Obtain a Credit Line

The process of application is similar to a loan. You need to fill in a form and provide the supporting documentation. Generally, you need to be between 25-55 years of age and meet the net monthly income criteria of the lender. Income criteria may vary from lender to lender. For a business line of credit, the business should have a certain tenure and have some designated minimum turnover amount.

7. From Whom to Get a Line of Credit?

The best way to get a credit line is to approach a lender with whom you have an existing trustworthy relationship. Alternatively, with the rise of Fintech, a number of alternate lenders too have cropped up, whom you can approach online with a few clicks. The best part of this source is that the line of credit approval time can be as low as a couple of hours, providing you with instant access to funds even in case of an emergency. It does not take much time to get your line of credit approved.

8. What to Watch Out For

In case of a floating line of credit, the interest rates may fluctuate as per the bank interest rates. This may prove to be expensive in the long run. Also, some lenders issue closing costs to close down a of credit line or maintenance charges to keep them running. Check for these to minimise extra expenses.

9. How to Protect Your Line of Credit

Some lenders also offer the option of credit line insurance, so that in the case of injury or death your payments can be suspended or the balance covered.

10. Tax Benefits

The interest on credit line is not tax-deductible. This is a disadvantage compared to certain types of loans such as home loan and education loan.

Clearly, line of credit presents various advantages. But you must remember that it is ultimately a form of debt, and any debt needs to be repaid in time and as per the terms. Especially with the ongoing nature of credit line, one tends to get ensconced in the debt spiral. Try to break free from this vicious cycle of debt as soon as possible and lead a financially healthy life!

MoneyTap is a 100% digital means of getting credit in times of emergencies. Infact, with its 4 mins approvals, it is must-have for everyone. Click below to experience its power.

MoneyTap

India’s first app-based credit line, MoneyTap is a Bangalore based business that lends money with flexible interest rates, making credit quick and easy.

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