What is a Line of Credit and How Does It Work?

What is a Line of Credit and How Does It Work? post thumbnail image

Life comes with its list of expenses. It can be some aspirations or some emergencies that cross your part. Be it your wedding, a luxurious purchase or you want to gift something, you always need enough cash. If you feel you are restricted by your pockets to purchase anything, you need to borrow. Borrowing from friends and family can look negative. It does not look good when you borrow within your cycle. Thanks to technology and changes, there are various types of debt available in the market. The diversified portfolio of debt and personal loan has been a great help to suit the needs of man. No one can help you out always, but a line of credit will. A line of credit is a quick way to have some fund in your account that you can use to meet your needs without any limitations as such.

What is a line of credit?

A line of credit is pretty similar to the kind of debt you use in credit cards. It offers you the benefits of using the fund without any restriction. There will be a particular amount of funds that will be sanctioned to you, and you can use it for anything and events. You can withdraw the credit as per your requirement and there are no limitations. If you are looking out for paying your bills or need some cash in hand, you can surely go for a line of credit. What is the best part? The rate of interest of like of credit is very low than the personal loan and credit cards. If you want some instant fund at a low-interest rate, you can surely go ahead and get a line of credit sanctioned.

Benefits of a personal line of credit

You may have queries as to why the line of credit when you can go for a personal loan instantly. To support your queries and give her suggestions, here is why the line of credit can be better than a personal loan

  • In a line of credit, you can withdraw any amount of money without any restriction. You can withdraw anytime without any limitations. However, in a personal loan, you have to apply for a personal loan and after approval; you get the loan amount credited to your account. Line of credit is already a sanctioned amount that you can use anytime to meet your needs instantly.
  • Line of credit sanctions a particular amount of fund in your name and you can withdraw your amount as per requirement. However, in an instant personal loan, the amount gets disbursed to your account only once. It can lead to a lot of wastage if you have the entire fund in your account. In the line of credit, your fund is secured and you can use it as per need.
  • The best part, in line of credit the interest is charged on the amount you have used. It does not charge you interest on the entire amount that has been sanctioned in your name. You only pay for what you have used. However, for a personal loan, the interest is charged on the entire amount that is disbursed to your account. It does not take into account the amount you have used, but the whole amount is taken.
  • The interest charged in a personal loan is always high as compared to the line of credit. The line of credit is available at a low rate of interest as compared to the personal loan.

Types of the line of credit

  • A secured line of credit: In the secured line of credit you have to support your sanction amount of money with security or collateral. It increases the chances of getting the credit at an upper limit. The rate of interest is certainly very and you can also negotiate for a better credit limit. The chances of approval are high when you attach security or collateral. As collateral, you can give your home, shares, jewelry, stocks, and other investments. It will secure your line of credit and offer you a better-secured way to borrow.
  • An unsecured line of credit: In the unsecured line of credit there is no need for any security or collateral to be given for the line of credit you go for. Since there is no security given, the rate of interest will surely be high. You can negotiate but the amount will be less. Here the loan provider will be at risk of non-payment as there is no collateral submitted to them. It is good to make your credit score better for future debt plans and home loans. You can use this to prove your creditworthiness.

Wrapping up

Use a personal loan calculator to handle your finances well. It will give you a way to a quick solution and helps in meeting all your demands and issue.

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