You may be in a scenario where you don’t know how much money you’ll need, or you may be in a stage of life when financial constraints have become a part of your life. All of this leads people to seek immediate financial assistance in order to deal with the problem. Loans are not acceptable in these cases because you are given a lump sum amount for which you must pay interest. Personal lines of credit, on the other hand, are more suited to dealing with regular financial difficulties than loans. Many financial institutions offer this service, which enables persons in financial distress to satisfy their immediate needs. Consumers with a line of credit have more freedom in terms of how much they may borrow and when they can repay it.
Personal Loan vs Line of Credit
Personal loans allow borrowers to borrow a large sum of money and return it over a certain period of time. The interest is calculated on the total amount borrowed, and repayment begins with monthly installments. Borrowers must pay interest on the entire amount owed, regardless of when, where, or how much money was utilized.
A line of credit, on the other hand, may be appropriate for borrowers who require regular access to funds. The line of credit allows you to access funds whenever you need them without having to apply for repeated loans.
More crucially, with a personal line of credit, interest is only charged on the amount that has been spent, not the total amount allowed.
A personal line of credit is appropriate for people who have frequent short-term cash flow problems and have enough money to repay the loan in a timely manner.
Things you should know about the personal line of credit
Interest charged
A personal line of credit’s interest rate varies depending on the lender. However, one advantage is that interest is only charged on the amount you use rather than the maximum amount available.
Credit limit
This is the total amount/maximum limit you have been given. Within this limit, everyone can borrow as much as they need. This maximum, however, is determined by the borrower’s eligibility and profile.
Purpose
Money withdrawn from this account can be used for any personal purpose, such as supplementing your monthly budget or funding a vacation. The money borrowed via a line of credit can be used as one wishes.
Eligibility
The eligibility conditions for obtaining a personal line of credit vary depending on the lender from which you are seeking. However, it mostly focuses on the applicant’s age, income, and ability to repay.
Secured and Unsecured Line of Credit
A secured line of credit
A secured line of credit requires collateral to secure the loan. Any of your assets, your fixed deposit, or the amount in your savings account can be used as collateral. In the event of non-payment, your asset ownership may be jeopardized. However, the interest rate on a secured line of credit is relatively modest in exchange.
An unsecured line of credit
An unsecured line of credit, as the name implies, does not require any security to secure your loan. In this manner, you’re not putting your asset’s ownership at risk. It carries a higher rate of interest than other loans.
To get a personal line of credit, you’ll need a solid credit score and a decent repayment history. Because the unsecured credit line isn’t secured, it’s much more crucial to make sure you don’t miss any payments.
