A financial emergency can strike at any moment. Sometimes, it may be difficult to estimate the exact amount of money required. For instance, for a health emergency, you may not be able to predict the hospital bill. For uncertain and emergency borrowing situations like these, credit line loans or a line of credit (LOC) can be a suitable alternative.
What is a Credit Line Loan?
A credit line loan is an arrangement between a borrower and a lender where a maximum loan limit is established and the borrower is allowed to borrow within that limit. In simple terms, a bank or financial institution sanctions the borrower a certain amount that they can use. It is up to the borrower to withdraw however much needed. The advantage of a line of credit is that interest is payable only on the utilized amount and not the sanctioned amount. You can think of it like a credit card, where interest is charged only on the sum used.
How Does a Credit Line Loan Work?
A credit line loan is similar to a credit card. The borrower can use the money within limits and can do so in installments. Repayment is in fixed intervals, like EMIs. The principal is usually repaid as a lump sum after maturity but can also be repaid in parts.
For instance, a person takes out a LOC for Rs.2,00,000 at 11% per annum. They use Rs.50,000 for their expenses. This means they can still borrow Rs.1,50,000 in the coming years. However, interest payable for the first year will only be Rs.5,500, chargeable on the borrowed amount of Rs. 50,000.
Credit line loans can be revolving or non-revolving. In a revolving or open credit line loan, you can keep borrowing until you hit the limit after repayment. For instance, taking from the above example, if you repay Rs.25,000 at the end of the first year, then you can borrow up to Rs.1,75,000. It can be an endless cycle until you want it to end. In non-revolving LOCs, once the payments are made, the account is closed.
What Is A Credit Line Loan Used For?
A LOC can be used for different financial purposes. A home equity line of credit (HELOC) can be used to borrow a variable amount by mortgaging your house. From emergency loans online to instant education loans, here are the most popular uses of credit line loans:
- Health emergencies
- Business projects
- Repayment of other loans
- Day-to-day financial needs
What Are the Types of Credit Line Loans?
Credit line loans can be broadly classified into three types:
- Personal Line of Credit – A personal LOC is sanctioned to individuals for personal reasons such as education, marriage or health emergencies. It can be secured or unsecured, meaning some require collateral while others do not. An unsecured personal LOC will charge a higher rate of interest and may require more creditworthiness than a secured personal LOC.
- Business Line of Credit – When a business entity needs a credit line loan, they can specifically apply for a business line of credit. This will require you to submit business registration papers, IT returns, financial statements and other business-related details. Just like personal LOCs, business lines of credit can also be secured or unsecured.
- Home Equity Line of Credit – A home equity line of credit or a HELOC is a secured line of credit that uses the equity in your house to sanction funds. This means that your house is used as collateral for sanctioning you a borrowing limit.
- Overdraft on gold – A gold loan overdraft facility also acts as an instant line of credit. With this borrowing solution, a loan applicant pledges gold to a lender and receives the loan amount. This can then be used multiple times for smaller loans, and the borrower only needs to pay interest on the amount that is used.
What Are the Benefits and Limitations of Credit Line Loans?
LOCs have many benefits:
- Borrowing amount is flexible, allowing you to borrow only as much as you need.
- Interest payments need to be made only on the borrowed amount
- It can be used for a variety of purposes.
- Online line of credit can be accessed from the comfort of your home.
However, credit line loans also have certain disadvantages:
- The interest rates on unsecured LOCs can go quite high.
- Late payments can incur heavy penalties and even damage your credit score.
- A revolving line of credit can lead to possible overspending and become a debt trap.
Is There An Alternative to Credit Line Loans?
An overdraft on gold can be a reliable alternative to an online line of credit. You can pledge your gold assets for funds. Gold loan overdraft facilities work similar to lines of credit. You can borrow as much as you need within the borrowing limit. After you pledge your collateral, you will get access to an overdraft account with the amount deposited. Interest will be charged only on the amount you use. Some of the advantages are:
- The amount can be deposited directly into your savings bank account.
- You can open a new account to access the loan amount.
- Access becomes easy, including debit card access and bank withdrawals.
- It can be repaid and closed any time.
- Lower rates of interest are available.
- Instant disbursal of loan amount
- Save on bank locker charges.
Rupeek has a quick and simple gold overdraft facility known as Rupeek Quick. You can pledge your gold assets in advance to get a credit line to use at any time you need. Rupeek’s facility is especially useful for small businesses with quick cash needs. With Rupeek Quick, you can get instant cash with a single click, anytime, anywhere.