What is Credit Line? Everything You Need to Know About

When people need money, the last thing on their minds is to apply for a line of credit (LOC). The first thing that springs to mind is going to a bank for a standard fixed- or variable-rate loan, putting credit cards to use, borrowing from relatives or friends, and so on. And this notion is because of the lack of clarity regarding the concept of credit line or line or credit.

This post explains the concept of a credit line and how it works.

What is Credit Line?

A credit line or line of credit (LOC) is a predetermined borrowing limit that can be accessed at any time. The borrower can withdraw funds as required until the limit is met. In the event of an open line of credit, money can be withdrawn again as it is repaid.

An LOC is a contract between a financial institution (often a bank or NBFC) and a customer that specifies the maximum amount of the loan that the customer is eligible to borrow. The borrower can withdraw funds from the LOC at any moment as long as they do not surpass the agreement's maximum credit limit.

How Does Credit Line Work?

All LOCs have a fixed amount that can be withdrawn, repaid, and borrowed again. The rate of interest, the size of instalments, and other regulations are decided by the lender. Some LOCs let you write checks while others incorporate a credit or debit card. A LOC can be secured (backed by collateral) or unsecured. With some banks or NBFCs, the unsecured LOCs often carry higher interest rates.

The main advantage of a LOC is its inherent flexibility. Borrowers may request a specific amount, but they are not required to utilise it all. Rather, individuals can adapt their LOC expenditure to their requirements and pay interest just on the amount drawn, not on the whole credit line. Borrowers can also change their payback amounts as needed depending on their budget or cash flow. They can repay the total outstanding amount at once, for example, or only the required minimum monthly payments.

Today, credit line apps like ePayLater have made the lives of business owners like retailers and consumers easier than ever as they offer instant approvals of certain amounts that can be utilised, the way the borrower wants.

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