Line of Credit - What is It & How Does it Work?

What Is a Line of Credit Loan?

A line of credit loan is an agreement between the lender and a borrower. The lender can be either a bank, a home finance company, or a non-banking financial services company. The line of credit agreement defines the maximum amount of funds that the lender can loan or advance to the borrower. The borrower can only withdraw up to the maximum sum as per the agreement.

The borrower only pays interest on the principal amount that is withdrawn and not the entire line of credit loan that is sanctioned. This is where the advantage lies in getting a credit line loan.

Most importantly, there is no limitation on fund usage. The borrower can use the funds for any purpose or to meet any need that he or she deems fit. Please note that this article is just for your information. SMFG Grihashakti does not offer this product at the moment.

Types Of Lines of Credit

A line of credit in India is available in two formats. These are:

Secured Line of Credit:

In the instance of a secured line of credit, the borrower is obliged to pledge collateral which is greater than the value of the line of credit being requested. With an asset as security to the lender, the borrower is able to negotiate lower rates of interest or terms and conditions more in favour of the borrower. These are usually financial assets such as fixed deposits (overdraft facility) or market linked instruments (loan against securities).

As the risk quotient is limited with the collateral, the lender may be willing to charge a lower rate of interest. In case the borrower fails to comply with the repayment obligations, the lender can liquidate the security to recoup the remaining loan amount.

Unsecured Line of Credit:

In this instance, the borrower does not have to pledge a security against the requested line of credit. However, from the lender’s perspective, this is a more risky transaction. The bulk of the line of credit loans are secured in nature, which attracts a lower loan amount and shorter repayment tenures.

The secured line of credit is the ideal funding alternative for the borrower to meet long term financial obligations, especially those to acquire an immovable asset such as a home loan.

Line of Credit Loan Advantages

Let’s take a look at the advantages of getting both an offline and an online line of credit loan:

Flexibility:

The line of credit, both online and offline offers flexibility to the borrower in terms of the fund withdrawal. The borrower is able to withdraw any amount up to the maximum sanctioned limit. This option is not available with common loan types like business or personal loans where the total approved funds are dispersed to the borrower’s bank account. On the other hand, loans availed through a line of credit have a shorter repayment tenure. This wouldn't be suitable for loans taken to acquire loan term investments such as property. For such purchases, a home loan would be a better option.

Cost-Effectiveness:

The borrower is liable to repay with interest the amount of funds borrowed via the line of credit, as agreed with the lender.

Best Suited for Business Owners & Self-Employed Individuals:

The instant online credit line is perfect for business owners who are unable to secure any short term form of credit especially when they are not sure of how much loan amount they need. Self-employed individuals can also get a line of credit with a lender when securing other forms of funding like a personal loan becomes difficult.

Large Credit Limit:

Several lenders may be inclined to provide a significantly large line of credit loans to borrowers. This enables them to manage their financial obligations much more efficiently.

Interest rates:

An instant line of credit online or offline attracts a much lower interest rate compared to other funding alternatives. Also, the interest component is only applicable to the amount of funds withdrawn from the account and not the total credit line amount sanctioned by the lender.

Benefits of Line of Credit

Here is how you can derive optimal benefits from your line of credit and not default on repayments.

• Only withdraw funds when you are in absolute need of them.
• Know exactly where and for what you intend to use the funds.
• Try to get secured business loans against property or commercial property loans instead of withdrawing up to the maximum limit of your credit line for long term investments.
• Minimise usage of other forms of credit like your credit card as it can double your debt.
• Have a repayment plan in place whenever you withdraw funds from your line of credit loan.

If you are looking for a mortgage loan for a long term investment, apply with SMFG Grihashakti today and enjoy the benefits of affordable interest rates, online application and transparent procedures.