Each individual, organization, institution, and even country has different financial needs. They encounter numerous circumstances when they must manage their financial resources and seek outside assistance in the form of loans. The options or plans that lending institutions offer are numerous. People have the option of using lines of credit to manage their tight budgets.
The purpose of this article is to clarify the definition of line of credit as well as related ideas like line of credit loans and online line of credit. Let’s start with the core idea before moving on to all of its components.
What is a Line of Credit (LOC)
A line of credit (LOC) is a predefined borrowing limit that customers can tap into anytime. The borrowers can take out the amount as needed until they reach the limit. Once they repay that money, it can again be borrowed in the case of an open LOC.
A financial institution makes an arrangement such as LOC for its customer and specifies the maximum loan amount for the customer to borrow. The borrower can access money from the LOC at any point, provided that they don’t exceed the predefined credit limit set in the agreement.
Different Types of Lines of Credit
After understanding the line of credit meaning, let’s move on to its types.
Personal Line of Credit
Customers can borrow unsecured funds, repay, and borrow them again.
Home Equity Line of Credit (HELOC)
The limit for borrowing is set based on the home’s market value (security).
Business Line of Credit
Businesses prefer borrowing on an as-needed basis rather than taking out a fixed loan.
Demand Line of Credit
In this rarely used LOC, the lender has the right to call the borrowed amount due at any time.
Securities-Backed Line of Credit
Borrower’s securities are provided as collateral in this special secured demand LOC.
Open-End Credit
A borrower can repeatedly withdraw throughout the draw period and make payments throughout the span of the loan.
Closed-End Credit
Money is lent for a fixed time, and this type is also known as an instalment loan.
Secured Credit
The borrower provides security to obtain a loan.
Unsecured Credit
The borrower need not provide any collateral.
Advantages of Line of Credit (LOC)
LOC has the following advantages –
- Quick access to your cash
- Repay only what you use
- Cover your expenses anywhere, anytime
- Your LOC can be unsecured
- Cover those in-between costs
- You can build your business’s credit
- Sort business and personal expenses
- Help your short-term goals
- Find lower interest rates
These advantages are worth considering while availing of a line of credit loan.
How Does LOC Affect Your Credit Score?
Lenders conduct a credit analysis when a borrower applies for a LOC. This leads to a hard inquiry on borrowers’ credit reports, which lowers their credit scores in the short term.
If you make late payments, it affects payment history, which is an important factor in calculating credit score.
Credit utilization also matters a lot when it comes to calculating credit scores. Nearly one-third of your credit score depends on credit utilization.
Length of credit history is another factor affecting your credit score. Although its share is less than credit utilization, it can affect your score.
What is the Repayment Process of LOC?
We have understood the concept, types, and advantages of LOC; now, we will have a look at the repayment process of LOC.
LOC is a revolving loan that allows a borrower to access the funds as and when required up to a specific limit. After repaying the borrowed amount borrower can again borrow the funds within the limits.
Repayment of LOC is not so complex. You can repay the amount you borrowed from your line of credit either immediately or over time in instalments (regular minimum payments). You will be charged with interest on your LOC as soon as you borrow the money.
How to Apply for a Line of Credit
Applying for LOC is the most important yet simple part of the process. You just need to follow the below-mentioned steps to apply for LOC. The steps for applying for the LOC are as follows –
Step 1 – Visit the nearest branch of the lender you have chosen
Step 2 – Fill up the necessary form and attach the required documents
Step 3 – The lender will then check your credit score and income level to evaluate your creditworthiness
Step 4 – The lender will accordingly sanction the LOC if you qualify for the same
You can also consider an online line of credit.
Conclusion
Line of Credit (LOC) is a type of financial support offered by lending institutions to needy persons, businesses, institutions, or governments. Catering to financial needs on time is possible with the help of LOC. You can borrow the amount required and repay the same with interest applied to it. The benefits of LOC are not restricted to managing your financial needs, but there are several others as well. The lenders today have kept a simple process to apply for LOC. You can follow the given process and enjoy the benefits of LOC.
Frequently asked questions
- What is a line of credit, and how it works?
LOC is a predefined borrowing limit similar to credit cards. There’s a maximum amount set, and interest is charged on the used sum. - What is a line of credit example?
You can qualify for a LOC for ?50,000; however, you can choose how much you want to borrow (out of your credit limit). Once you repay the amount borrowed, you can access the available credit up to the pre-approved limit. - What’s the benefit of a line of credit?
The key benefit of LOC is the ability to borrow only the required amount and avoid paying interest on a large amount. - What is the line of credit limit?
Your bank decides the maximum sum you can borrow from a LOC, and it’s also mentioned in your LOC agreement. - What documents are required for a Line of Credit?
- Identity proof
- Proof of employment
- Proof of residence
- Proof of income
- Proof of age
- Bank statement
- PAN card
- Aadhar card
