A line of credit (LOC) is a preset borrowing limit that borrowers can withdraw at any time. It is an arrangement between a financial institution, usually a bank, and a client.
The borrower can obtain money as needed until reaching the limit. It is a flexible loan from a bank or financial institution. Similar to a credit card, as money is returned, it can be borrowed again in the case of an open line of credit.
Likewise, a Line of Credit is a benefit for those who need financial support at frequent intervals. As with a loan, a line of credit will impose interest as soon as money is borrowed not on the whole amount. The interest rate is usually variable. Lines of credit tend to be lower-risk revenue sources relative to credit card loans. Resulting from this, the customer can maintain monthly payments without becoming overloaded with the loan EMIs.
What are the Features of Line of Credit?
1. Unsecured:
As a credit line is an unsecured loan, there is no need for collateral.
2. Interest Rate:
The borrowers save a large amount by not paying the interest rate on the loan amount which is unused not on the total amount. Eventually, reduces the burden of paying off EMIs.
3. Higher Loan Amount:
Under the line of credit which is termed under business loans, MSMEs can avail a high loan amount.
4. No Hidden Charges:
There are no extra or hidden charges levied on the unused credit line or the total sanctioned amount.
5. Flexible Re-payment Tenure:
Borrowers find it flexible and it offers a relaxed interest rate that needs to be re-paid in the form of EMI for only the money borrowed.
What are the Advantages of Line of Credit?
1. It can be used in various forms. These include discounting, demand loans, overdraft protection, commercial bill purchases, revolving credit card accounts, and so on.
2. For self-employed individuals, LOC is immensely beneficial as they can take the amount in a smaller quantity and set up a business.
3. This provides a substantial amount of money in the bank that can be claimed at any time if required.
4. Individuals who don’t want to go for personal loans owing to the high interest rate charges can opt for LOC.
5. While you opt for a line of credit, you can expect to have a very high credit limit.
What is the Eligibility Line of a Credit Loan?
1. Good credit/CIBIL score
2. The creditworthiness of the borrower
3. Decent tenure of business existence
4. Valid and authentic business documents and certificates
5. Stable credit and financial history
6. Business existence with profitability
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