Borrowers will use the funds if and when they need them, including several times beyond their cap, without incurring any extra fees. Line of credit and other options of immediate debt are becoming a necessity in this period of widespread diseases.
People are facing a variety of problems and difficulties as a result of the increase in Covid cases, and as the pandemic progresses, one of the most significant is financial pressures. The second outbreak of the pandemic, as well as the resulting lockdown, has had yet another negative effect on industries and the working-class community. About every other month, unexpected costs emerge that most people have not budgeted for or prepared for.
Although people are forced to use credit due to a lack of funds, it is, therefore, necessary to research the various borrowing opportunities and prepare accordingly. There are a variety of options available, including a line of credit (LOC), a personal loan, money lent on a credit card, and so on.
A line of credit (LOC) is a predetermined borrowing cap that can be accessed at any time, similar to a credit card loan. “When a borrower applies for a Line of Credit, the borrower will draw up to a certain amount on an as-needed basis,” says Gaurav Chopra, Founder and CEO of IndiaLends. In the case of an open account, interest can be levied only for the sum lent, and when money is returned, it may be borrowed again.
What distinguishes a line of credit from a personal loan or a credit card loan?
A line of credit is more like a credit card than a personal loan. In comparison to a credit card, credit lines typically come with more convenient options for converting funds into a deposit, allowing the borrower to repay them over a longer period of time. “Unlike a Line of Credit, loans have a non-revolving credit cap, which means the borrower only has access to the amount loaned once,” Chopra explains. However, for a Line of Credit(LOC), the creditor has constant access to the funds and may use them if the need arises for the duration of the loan.”
Furthermore, there is no need to use the LOC if you need it. Borrowers are able to pay for it when they use it.
In today’s world, what is the purpose of a LOC?
According to industry insiders, the line of credit has built-in versatility in terms of where and how much to invest, as well as how and when to repay it. One of the major benefits is that after the creditor repays the loan, he or she has the ability to withdraw or renew funds as many times as necessary. Experts believe a line of credit will be more affordable in the long run because borrowers just pay for the funds they use.
“Given the current scenario, a line of credit will be the best solution because it allows you to access the funds when and when the need arises (and just pay for what you need and when) without having to apply for several loans,” Chopra continues. A line of credit is an excellent way to cover a temporary cash deficit, which many people see right now.”
Advantages and disadvantages of a LOC versus a personal loan
Advantages:
- Borrowers will use the funds if they need them, including several times beyond their credit cap, without incurring any extra fees.
- Borrowers with a line of credit have more flexible lending opportunities.
- Interest is charged on a line of credit only on the sum used by the borrower, not for the whole line.
- Lines of credit should be approved only and used for an extended period of time.
- It also aids in the improvement of your credit score.
Drawbacks:
- The creditor will be paid maintenance fees on an annual or monthly basis.
- To apply for a Line of Credit, you must have a decent credit score.
- Because of the product’s versatility, the interest rates are flexible and can be marginally more costly than a personal loan.
- Not all financial institutions have a line of credit, and the creditor will be required to provide an account with the lender.
Eligibility requirements for a line of credit
To apply for a line of credit, the applicant must have a good credit background.
- Credit score: As opposed to a personal loan, lenders also need a higher credit score for a Line of Credit. When applying for a Line of Credit, you must have a credit score of 700 or higher. A higher credit score will also assist you in negotiating better terms.”
- Credit history: The creditor should have a track record in making on-time payments, demonstrating that he is a conscientious borrower.
- Monetary situation: A good debt-to-income ratio, cash on hand, and net worth are some of the variables that decide a borrower’s financial situation, indicating their willingness to repay debts.
“As part of the application process for a Line of Credit, the lender can conduct a hard inquiry on the borrower’s credit reports, temporarily lowering their credit score by a few points,” Chopra continues. Aside from that, if the creditor misses payments, it might hurt their credit score.”
