What is Personal Line of Credit and How it helps?

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Personal Line of Credit is a form of borrowing just like personal loan, with added features. It is a mix of credit card and personal loan. It is a personal loan that acts more or less like a credit card.

Also, it is an unsecured loan type where the applicant does not have to give any collateral security to get the loan. Usually salary slips and Income Tax Return are the two prime documents required apart from the default ID and address proof.

Personal Line of Credit vis-a-vis Personal Loan

In Personal Line of Credit, one gets a fixed amount of loan along with withdrawal flexibility. Here, the loan amount is sanctioned at the time of application but the amount is not disbursed all at once. Instead one can withdraw at their convenience depending upon the requirement at the moment. And the interest is payable only on the withdrawn amount.

For instance, say Mr. A has applied for a Personal Line of Credit for Rs. 500,000. He will get the sanction for this amount upon application but he will not receive the entire Rs. 500,000 all at once. Instead he has the flexibility to withdraw whatever amount he wants at any time.

Say, he wants to buy a new bike and needs Rs. 50,000 to meet the requirement. So, he withdraws Rs. 50,000 from the sanctioned amount of Rs. 500,000.

Here, Mr. A will have to pay interest not on Rs. 500,000, which is the sanctioned amount but the amount withdrawn of Rs. 50,000.

In this way, the Line of Credit gives the customer a financial strength and at the same time the withdrawal facility limits the financial burden of EMI.

There’s also one more added feature of Personal Line of Credit that makes it a good choice for credit. Unlike Personal Loan, in Personal Line of Credit, you have the option to pay only the interest as EMI. The principal part can be repaid after the end of tenure.

Taking the above given example,

Mr. A will have to pay interest only on the amount withdrawn, which is Rs. 50,000. If the interest is say, 10% p.a. , then the interest amounts to 50,000 x 10% x 1/12= 417. Thus, Mr. A has to pay only Rs. 417 as interest for the month. And that will be his EMI. He can pay Rs. 50,000 at any time before the end of the tenure of the loan.

If the loan was for 5 years, and assuming he did not make any withdrawal other than Rs. 50,000, then he has to pay only the interest amount every month as EMI and he can repay the principal amount any time he wants whenever he has the funds within 5 years. He can repay the principal in full or in installments.

Line of Credit in India was earlier not popular but has grown massively in the past few years due to formalization of savings. Rather than borrowing money from friends and family, people now prefer to avail a personal line of credit from banks.

Personal Line of Credit vis-a-vis Credit Card

The features of Personal Line of Credit might confuse one into thinking that it is similar to the credit card facility. Well, there is a difference between the two.

Personal Line of Credit generally offers a higher credit limit along with a lower interest rate as compared to Credit Cards.

The interest rate on Personal Line of Credit is similar to Personal Loan which is usually around 13 to 15% whereas the interest rate on credit cards is around 36% to 40% p.a.

In credit cards, the card holders usually get additional benefits in terms of reward points, cashbacks or free goodies. But in line of credit there are no such perks.

One major advantage of Personal Line of Credit over Credit cards is that it does not have cash withdrawal restriction whereas in credit cards there is a restricted limit beyond which one cannot withdraw cash due to which at even at the time of emergency one cannot withdraw cash.

Overall benefits of Personal Line of Credit

  1. Lower Interest Rates

The interest rates of Personal Line of Credit is much lower as compared to Credit Cards. It ranges between 13% – 15%.

  1. Lower Installment

Personal Line of Credit offers an option of paying only the interest amount as EMI and the principal amount can be paid at the end of the tenure or even earlier, whenever the customer has sufficient funds to pay back the loan amount. Thus, lowering the overall EMI as it only has interest component and not the principal component.

Also, the interest is calculated only on the amount withdrawn not on the entire loan amount. Therefore, if the amount of loan used is less than the sanctioned loan amount, the interest will be charged only on the used amount and not on the entire loan.

  1. No Collateral Security

No collateral security is required to get a Personal Line of Credit. The banks usually ask for salary slips or the Income tax returns as additional documents besides the ID and Address proof.

  1. No Hidden Cost

There are no hidden charges to get a Personal Line of Credit. Usually there is an upfront payment, annual fees or processing fees, all of which are disclosed at the time of application.

  1. Unrestricted Cash Withdrawal

There is no cash withdrawal restriction in Personal Line of Credit. One can withdraw as much cash as they need up to the loan limit. You can withdraw the entire loan amount in cash. However, credit cards have a cash withdrawal restriction due to which at even at the time of emergency one cannot withdraw cash.

  1. Flexible Repayment

Personal Line of Credit offers the option of flexible repayment as only the interest component has to be paid as EMI, the principal component has flexible repayment option. It can be repaid at anytime within the tenure of the loan amount.

Therefore, if you are looking for credit to finance your financial needs, consider the Line of Credit option. It is an ideal option to finance medium term needs as it offers the best of two popular credit options, Credit Cards and Personal Loan.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.