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Home >Money >Personal Finance >Line of credit and how it works?

A line of credit (LOC) is a pool of money that you can borrow from a lender as and when you need. A credit line in the case of individuals is almost similar to a credit card, except that you don’t need to carry any plastic card.

For instance, Vivifi India Finance offers a Flex Salary which is a line of credit product for salaried consumers for emergency use.

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"Credit lines typically come with more flexible options to convert the utilized funds into a loan which gives flexibility for repaying them comfortably over a longer tenure as compared to a credit card. These are typically offered by new-age fintech," said Abhishek Soni, co-founder and CEO, Upwards, a Mumbai- based fintech firm.

How it works

"A line of credit works like the combination of a personal loan and a credit card. In this format, the customer has the option to withdraw money into his bank account as and when he needs it. There is no obligation to use the line, and you only pay for the line you use. LOC interest rates are usually cheaper than credit cards but higher than personal loans. They don't offer the convenience of a credit card - like transacting and flexible repayment features," said Prithvi Chandrasekhar, Chief Risk Officer, InCred, a Mumbai-based fintech firm.

For instance, if you have a credit line of 1 lakh and withdraw only 50,000, you pay interest on only 50,000. And once you pay back, you have a 1 lakh limit available once again.

The pros of using a line of credit

> Line of credit charges interest only for the amount utilized by the consumer and not for the entire line

> Line of credit principal payments are flexible and can be repaid at the consumers’ convenience as long as the interest and fees are serviced

> It allows consumers to redraw within their limit multiple times generally without any additional charge

> Line of credits can be approved once and used over a long tenure generally three years

> It also helps build your credit score

The cons of using a line of credit

> Some providers charge annual fees or maintenance fees which may be an unnecessary expense if you don’t use the line often

> Line of credit at times may seem more expensive than a personal loan because of the flexibility offered by the product in the interest rate part, though the actual cost to the consumer might be lesser

> Line of credit is not offered by all institutions, and the product may not be well understood by consumers

It is pertinent to note that borrowing is always a serious matter and that obligations must be repaid. Therefore, given the fact that funds are easily available via a line of credit, it might lead to unnecessary expenses and interest cost if not used wisely.

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