Financial variability can be a tricky thing to deal with for anybody. Although, it’s mainly small business owners and freelancers who experience this more frequently and rely on their fluctuating monthly income to pay their bills. In such instances, a credit card might come to your rescue. But what would you do if the amount you need to pay is substantial? You could take advantage of your credit score and take a personal loan. But loans come with high-interest rates, and not everybody can choose to live with the mental burden of having to pay the money back.
A credit line can be the safest and most viable choice in such cases.
A line of credit is an amount borrowed from the bank. That sounds similar to loans, but they’re pretty different. A line of credit has a prefixed maximum amount approved by the bank to the borrower. Think of it as a credit card limit, but here you get to decide what the limit will be instead of the bank (though in the end, it’s on the lender to approve it). Unlike a loan- where you have to pay the interest on the entire amount you borrow from the bank, with a line of credit, you pay the interest amount for the amount you use until the fixed maximum limit.
A simple example illustrating this is as follows: An imaginary person owns a business and has variable gross income each month. The person’s monthly expenses are 100000 INR or less. One month when the person’s company didn’t do well, the person needed 100000 INR to sustain. Instead of taking instant personal loans, our imaginary person decided to take a credit line of 100000 INR from the bank. In the end, the imaginary person used only 40000 out of the 100000 INR. Thus, the person only had to pay the interest on the 40000 INR used.
Another benefit of a personal line of credit is that it is similar to an unsecured loan. In other words, it doesn’t require collateral. Usually, a good credit score closer to 700 will make you eligible for a line of credit. Additionally, proof of stable income or savings can help.
Another benefit is the flexibility of repayment. While loans have a fixed repayment schedule, the repayment schedule for a line of credit may vary. Additionally, unlike loans with fixed income rates, a line of credit usually has a variable and lower interest rate. Sometimes, you may be able to negotiate the interest rate with the lender.
However, like everything that involves money, there are a few cons that borrowers must take into consideration before getting a line of credit. As mentioned before, interest rates vary, so when the interest rate becomes higher, the amount that has to be repaid will also rise.
Another advantage of a line of credit that differentiates it from fixed loans is that there’s no need for the funds to be used towards the purpose the borrower borrowed it. The borrower can access as much money as they want below the pre-approved limit and use it for anything they want. Furthermore, successful repayment of a line of credit can contribute towards a stronger credit score.
Nonetheless, a line of credit is an excellent alternative over small personal loans as they give the borrower more repayment flexibility.