A line of credit (LOC) is a revolving loan account from which you can withdraw funds up to a particular threshold limit, as and when you want. The advantage of an LOC is that it is easy to get. And it offers flexibility to you and creates an ongoing credit association with the lender. This makes it especially useful for business, where the revolving credit supply helps fund critical business activities like working capital requirements and immediate expenses.
Types of Line of Credit
A credit instrument can basically be of two types i.e. secured and unsecured. Secured line of credit means that you get the loan against a collateral that you place as security. If you default on your payments, the lender can seize or liquidate your asset. On the contrary, the unsecured line of credit definition is “a revolving credit account for funds withdrawal which does not require you to place any asset as collateral”. Unsecured line of credit rates usually varies as per varying bank interest rates i.e. they are floating interest rates. The interest rate for line of credit ranges somewhere between 10.5% to upwards of 14-15%.
Depending on the purpose for which the line of credit is used, it can be classified as personal and business line of credit.
- Unsecured Personal Line of Credit: 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. The application is personal in nature.
- Unsecured Business Line of Credit: 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.
Requirements For Unsecured Line of Credit
Because an unsecured line of credit does not involve any guarantor asset which is pledged against the loan, it poses a greater financial risk to the lender than a secured line of credit. In fact, you may look at an unsecured line of credit as a form of unsecured loan. It typically involves stringent approval processes and strict assessment of the “ability to repay the credit”. Generally, you need to meet the following criteria to be able to avail an unsecured line of credit.
- Age between 25-55 years.
- Salaried professional with respectable financial credentials, working at a public or private organisation (in case of personal LOC)
- Meet the net monthly income criteria of the lender, which may vary from lender to lender.
- For business, the business has to be in existence for a certain specified time period (which is usually one year). And it must have a minimum turnover amount.
- A good creditworthiness i.e. good credit score / CIBIL score.
Of course, there is a host of documentation required to process an unsecured line of credit application online or offline. These include salary slips, bank account statements, proof of employment or business documentation such as financial statements, identity proof, address proof etc.
You can know whether you meet the eligibility criteria by entering your details in a number of online eligibility score calculators or line of credit calculator created by banks. Alternatively, a number of online lenders such as MoneyTap can also help you know your eligibility. Today it is quite easy to avail a line of credit for any purpose. And it has been made possible due to the fintech companies that are burgeoning. Make the most of these available credit sources and fund and fuel your financial needs.