Even if you have been smart and sensible and made your savings for eventualities, sometimes the reality turns out to be very different than the plans. It leaves you with no other option than to borrow money for the situation.Generally, for such eventualities, one would opt for a personal loan. But what will happen if you are not eligible for a personal loan?
If you get rejected by a lender for a loan it will certainly worsen the situation for you in future. For such circumstances the only way out is the Personal Line of Credit. Let’s get to know this modern way of borrowing which indeed better than a personal loan in terms of transactions as well as eligibility criteria.
A personal line of credit is a loan much similar to the likes of a credit card. A lender approves you a certain amount, which you can withdraw in installments, but you pay interest only on the amount you avail and not on the whole amount. A personal line of credit can be a useful tool when you need to borrow money in installments, such as for paying for an ongoing home improvement project.
Much like a credit card, a borrower can withdraw a required amount as often as needed provided, he doesn’t exceed the maximum credit limit. Generally, personal lines of credits are collateral free loans. You can withdraw the desired amount from the line of credit and repay back to maintain the balance. A line of credit is very handy for any financial emergencies.
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A personal line of credit unlike a personal loan, has no fixed time frame to return the borrowed amount. With a personal loan the loan amount has to be paid back within the prefixed time, usually 1- 5 yrs. Whereas, for a line of credit, there is no fixed time for the loan repayment. The fund you borrowed is available once again, when you pay the borrowed amount.
Similar to the tenure, there is no fixed term in repaying a line of credit. While availing a personal loan, you will be debt free only when you repaid the fixed amount in its allotted time period. Whereas,for a line of credit payment depends on the previous balance, amount drawn, accruing interest etc.
When you avail a personal loan, the amount is disbursed in a lump sum. But for a financing by a line of credit, you can withdraw the amount in many small parts as and when required.
Both a personal loan and a line of credit have different charges. To avail a personal loan, you have to pay a one-time processing fee whereas to for a line of credit, you have to pay a fee every time you withdraw money.
The cost of availing a personal loan is higher than a personal line of credit, because of the interest rates. For a personal line of credit, you are to pay interest only on the amount that you have accessed. But for a personal loan, you have to pay interest on the complete loan amount. Moreover, the whole borrowed amount can be repaid in the following month, which will save you from the burden of compound interest which impacts the repayment more when you have a longer tenure to repay the loan.
Addition reading : 8 POSSIBLE RISKS OF UNSECURED PERSONAL LOANS
A personal line of credit works best when you are not confident or confirmed of the exact amount and the time when you would need a financial support. A personal line of credit is also helpful for an emergency fund.In India, the concept of line of credit is still new and only a few lenders offer a personal line of credit.
Some NBFCs provide a personal line of credit of up to Rs. 5 lakhs. The credit limit is available for the lifetime along with rewards on the first use of money tap credit card.