In a maturing financial market, there are several ways in which you can avail credit and get access to funds. The catch lies in choosing which product or financial instrument is right for you. In case you are looking at products which don’t charge huge interest rates, then you should try a personal credit line which charged interest only amount the used.
Credit Line Vs Personal Loan
A personal loan gives you a fixed amount for a fixed period. The repayment schedule is fixed and pre- payment might attract an additional fee. For a single, one-time payment, this may be the preferred option. A personal credit line is a lot more flexible. Once approved, a credit line is made available to you which you can use anytime, anywhere. The approved credit limit depends on your credit-worthiness determined by your CIBIL score, income and credit history. The interest kicks in only on the amount you actually use and not for the entire credit line. Once you repay a part of the amount, the interest will be calculated on the outstanding balance. Consequently, the repayment schedule is flexible and the interest is applied on a monthly reducing balance or even a daily reducing balance (differs from bank to bank).
Charges and Fees
Banks, NBFCs (non-banking financial company) and various FinTech companies that tie up with banks are now offering products that allow you to have a personal credit line. The generic charges would be as follows:
1. Joining /Activation Fee: This is a small one-time processing fee that may or may not be charged. Some banks do not charge anything at the time of approving a credit line but may charge on the first usage/withdrawal of the fund.
2.Rate of Interest: This is variable depending upon the credit line approved and the customer’s credit history. It is typically between 16-25% p.a and is calculated for the outstanding balance only.
3. Annual/ Processing Fee: Similar to credit cards, the lender may charge an annual or maintenance fee which can be 1-2% of the approved credit line amount.If the annual fee is not charged, you might be charged a processing fee for every withdrawal.
4.Tax: The applicable government taxes and levies will be charged wherever applicable including the interest.
Why should I choose a Personal Credit Line?
Having a personal credit line works well when the amount you need is not fixed and your spending may be spread over a few months or a year. Medical emergency, home improvement, marriage or a long travel are some reasons where having a credit line might prove helpful. Businesses and self-employed individuals whose monthly cash inflow is not fixed benefit greatly with this kind of ready credit. You can access this money through the ATM, cheque book, online banking, mobile banking or phone banking depending on which bank or service provider you avail it from.
Where can I get a Personal Credit Line from?
As mentioned earlier, banks, financial institutions and FinTech companies that are revolutionizing mobile banking are now offering personal lines of credit. In India, Citibank has a product called Ready credit while Standard Chartered is offering Smart Credit Overdraft. Recently launched, MoneyTap offers an innovative mobile app that gives you money on demand in partnership with banks and NBFCs. Your credit line gets approved within minutes and funds are made available on your phone within 24 hours. Read more about MoneyTap here.
Remember, like any financial offering, a credit line may be flexible but is certainly not free money. If you do not use it sensibly and if you are unable to repay in time, it can affect your credit history and will make it difficult for you to get loans in future. Having said that, as long as you make the repayments timely, it can be of great help in easing out cash flow and improving your credit history.