What Is Line Of Credit And How It Works?

XI: What Is Line Of Credit And How It Works?

Highlights:

  • What is a Line of Credit?
  • Pros and Cons of Line of Credit
  • How is Line of Credit different from a Credit Card?

A Line of Credit also known as LOC in the finance sector is a pool of money that one can borrow from a lender as and when they need it. A credit line, in the case of individuals, is almost similar to a credit card, with the exception that you don’t need to carry any plastic card.

For example, Vivifi India Finance offers a Flex Salary which is a Line of Credit product for the salaried consumers which can be utilised for emergency use.

Co-Founder and Chief Executive Officer (CEO) of Upwards, which is a Mumbai-based Fintech company, Abhishek Soni, said, “Credit lines typically come with more flexible options to convert the utilized funds into a loan which gives flexibility for repaying them comfortably over a longer tenure as compared to a credit card. These are typically offered by new-age fintech”.

How Does Line of Credit Works?

The Chief Risk Officer at InCred, Prithvi Chandrasekhar said, “A line of credit works like the combination of a personal loan and a credit card. In this format, the customer has the option to withdraw money into his bank account as and when he needs it.”

He added, “There is no obligation to use the line, and you only pay for the line you use. LOC interest rates are usually cheaper than credit cards but higher than personal loans. They don’t offer the convenience of a credit card – like transacting and flexible repayment features”.

InCred is also a Mumbai-based fintech firm.

For example, if you have a Line of Credit of ₹ 5,000 and withdraw ₹ 2,00,000, then you will pay interest on just ₹ 2,00,000 and as you pay back the money you will have the ₹ 5,00,000 credit limit available again.

Also Read: Credit Cards: Advantages And Disadvantages Of Using Them

Advantages Of Line Of Credit?

  1. Line of Credit charges interest only for the amount which was utilised by the user and not for the entire amount available in the credit
  • Line of Credit principal payments are flexible and can be repaid at the consumers’ convenience as long as the interest and fees are serviced
  • It allows users to make multiple drawing within their limit which generally comes without any additional charge
  • Line of Credits can be approved once and used over a long tenure which generally lasts for three years
  • Line of Credi also helps build one’s credit score

Disadvantages Of Line Of Credit

  1. Some providers could charge annual fees or maintenance fees which may be an unnecessary expense if you don’t use the line often but this is the same for Credit Cards as well
  • At times, a Line of Credit could seem more expensive than a personal loan given the flexibility offered by the product in the interest rate part, though the actual cost to the consumer might come out to be lower
  • Line of Credit is not offered by all institutions, hence, the product may not be well understood by consumers

All the information above does not overshadow the point that borrowing is always a serious matter and the obligations must be repaid. Hence, given the fact that funds are easily available via a line of credit, it might lead to unnecessary expenses and interest cost if not used wisely.

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Ajay Kumar

Ajay joined our team as a content writer after earning his master's degree. He has been writing for since his graduation as a freelancer and raises voice for the people in need with his work. He likes to work on data-driven news reports. When he is not writing, he spends his time with his family.

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