How Does a Personal Line of Credit Works?

| October 8, 2017

Line of CreditA line a credit is a leading arrangement between the bank and a business entity or an individual. In the line of credit, the borrowers are allowed to borrow a maximum amount as a loan by banks.

The withdrawal of the sum is also not restricted as they are free to withdraw it anytime they want. Now, this borrower can be any business or individual government entity. They are free to withdraw as much amount they can.

The line of credit comes with two advantages: first, you are only charged interest on the amount drawn and second, the rate of interest is less than a one-time loan. Before applying for the line of credit it’s necessary to check the pros and cons.

There is a difference between a normal loan and a line of credit. It’s not necessary to use the money for a pre-specified purchase in a line of credit. A credit line is almost similar to a credit card but without the plastic.

The line of credit is divided into two: secured line of credit and unsecured line of credit.

What is a Personal Line of Credit?

Having a personal line of credit helps you in financing the unexpected expense which can knock your door anytime. Now a personal line of credit is a loan which is taken prior.

This helps you manage the expenses which can occur in future. It differs from the usual loan where you pre-decide the purpose of the loan. There is no limit when it comes to spending this money.

Also, you only start paying the interest once you have spent the borrowed amount, and this is a facility which is not offered by any other loan product. In a personal line of credit, you are free to use as many credits as you want.

And also there is no repayment period when it comes to the personal line of credit. The minimum amount to be paid can either be interest plus the principal or only the interest.

These personal lines of credit are offered by banks as well as credit unions. You can either go to banks or go to the credit union when you want to borrow personal lines for credit.

You can either go to the bank personally or complete the application process online.

There are many banks that offer you with an overdraft facility. This can also be called as a line of credit. In case your account balance runs down to zero then banks can cover the payment.

After this payment is covered the bank’s charges you interest. The banks also charge you for using the overdraft. But instead if you go for a line of credit you can save paying those charges plus you are asked to pay a low-interest rate.

How Big is the Credit Limit?

Usually, a personal line of credit depends on what you are going for. The amount can differ for a secured and unsecured line of credit. The line of credit depends upon your other factors too like the credit score, outstanding loan EMIs, debt repayments, etc.

Also Read: Does a Line of Credit Give You Smarter Financing

Comfortable To Use

A personal line of credit is easy and comfortable to use. You can either write a cheque or can withdraw the money from your ATM. You can also do a money transfer to another account.

During the process of withdrawal, you need to remember about the money repayment. You are free to withdraw from any device you prefer.

Avoid the Spiral Debt

It’s important for one to know its limit. You might get tempted sometimes to do a purchase which can be overboard, but you need to remember your limits when it comes to spending your cash.

It’s important that you plan the amount that you will be spending in advance. This can future save you from that extra debt.



Category: Loans

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