Found valuable equity that you’d like to invest in but lack the resources? Or have to pay bills from an unfortunate car accident? Be it an impromptu purchase or an unforeseen expense, every now and then instances come up where you might have found yourself wishing for an extra source of cash. While taking a personal loan may seem far-fetched and paying credit card bills
might be out of the budget, what you can do is opt for a personal line of credit!
But, what is a personal line of credit? How is it better than a personal loan? Are the repayable interest rates better? Find answers to all that and more in the article below!
What is Personal Line of Credit?
A personal line of credit is a type of credit source that is extended to individuals from a bank or a lending institution. It allows you to maintain a maximum loan balance account with the lending institution, from which you can borrow amounts that are lower than or equal to the credit limit as and when the need arises. The borrowing limits, repayment interest rates, minimum monthly payment, the tenure are all decided while establishing the line of credit with your bank/lending institution.
A personal line of credit can be a useful tool when you need to borrow money incrementally. It also comes in handy in cases where you need additional funds but have to maintain a minimum balance in your checking account. The ease of access and the minimal payment requirements make this kind of a credit source highly preferable among a majority of the working population these days.
How Does a Personal Line of Credit Work?
While your lender will pre-approve a particular sum of money, you need not withdraw the entire amount immediately, unlike a loan. But instead, you have the freedom to access the funds over a period of time, as and when you need them by simply writing a check or making an electronic transfer.
Another feature of the line of credit is that you only have to pay interest on the amount you actually use and not the amount set as your credit limit, significantly reducing the repayable amount after interest. The line of credit may also have an annual service fee and that is payable regardless of whether you use the funds or not as far as the account is open.
Who Can Avail Such a Service?
Anyone with a strong credit history who can prove his/her ability to replay the borrowed some can opt for a personal line of credit. In fact the better your credit rating, the more likely you are to get a personal line of credit.
How Does a Personal Line of Credit Differ from Other Sources?
• Line of Credit versus a Personal Loan
First and foremost, unlike a personal loan, a personal line of credit allows you to borrow only the amount you need and offers a variable interest rate that is generally lower than that of personal loans. And the repayment amounts are directly influenced by your outstanding balance.
• Line of Credit versus a Credit Card Cash Advance
While credit card cash advances are similar to personal lines of credit in terms of withdrawing only how much you need, credit card APRs are generally higher than those of lines of credit. But that's not all, credit card cash advances may also come with extra fees, so if you are confused between both options, be sure to properly analyze the interest rates as well as the additional service fee and make a well-informed decision.
• Personal Line of Credit versus HELOC
If you are a home owner, you are also eligible for a home equity line of credit (HELOC), where your property will be used as collateral. And since this is a secured line of credit, the interest rates on a HELOC will be generally lower than the personal line of credit.
However, this method is not recommended because putting your home up as collateral puts the property at risk and if you can repay the HELOC, you can lose your house! Since the personal line of credit is unsecured, the maximum that can happen is a larger penalty for non-payment of the sum borrowed.
Advantages of a Personal Line of Credit
1. Instant access to cash
2. Higher credit limit
3. Lower interest rates
4. Interest payable only on amount withdrawn
5. Interest paid is tax deductible
6. No restrictions or limitations on usage of funds
7. Provides an additional resource and helps you avoid dipping into your long-term savings accounts
Another factor to consider when deciding whether you should go for a personal line of credit as opposed to the various other loan options available is the repayment clause.
Most personal loans have a clear, straightforward repayment system where the borrower makes regular payments for a set repayment term. In such arrangements, the monthly payments are set at the beginning of the loan where the balance and interest earned on the loan are calculated, and divided over monthly payments to ensure complete repayment of the loan within the repayment period.
Payments for a line of credit, on the other hand are not set up for paying off the credit within a certain time frame, and rather a minimum payment amount is set, depending on the outstanding balance. The interest rates on a line of credit is usually determined by the lender themselves, so it’s best to do your research before picking an institution you’d like to avail a personal line of credit from.
As you can see, a personal line of credit not only increases your financial freedom, but also works as a back-up in a multitude of situations. Be it a long-term dream or an unforeseen incident, you shouldn’t have to compromise on your lifestyle because of it!
, we understand the true importance of financial freedom and we strive to fulfill every little dream of people who simply give up just because they lack money. So, we make it happen for everyone who couldn’t otherwise! If you are interested in a personal line of credit and want more information on the topic, let MoneyTap show you the way!
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India's first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics, so email him your questions at firstname.lastname@example.org.