Line of credit
When there is a need for money one has the option of loan. A loan is lending of money done by the lender (generally banks) in a single payment to the borrower. The borrower has to repay the money to the lender as per the agreed term later on. Here the borrower has to accept the whole amount of loan.
Line of Credit: The line of credit is another form of borrowings with an added advantage given to the borrower who has got the benefit to ask for any amount of loan, within specified limit, from the lender and thus pays interest on only such amount. This way the interest cost on whole amount of borrowings can be avoided by the borrower. This also gives the borrower an option to take the loan only up to the amount required that too on demand.
Uses of Line of credit: There are no defined uses for the line of credit. Its simply just an amount that is borrowed from the lender. One can use it for the daily expenses or even the repayment of home loan it totally depends upon the borrower how he wants to use the loan amount. The lender is interested in the fact that the borrowings are within limit and the repayment of loan together with interest is regular, the lender is least bothered about how the money is used.
Types of Line of credit: As already said, line of credit is an arrangement between the lender and borrower whereby the borrower has the freedom to ask for an amount of money within the limit; also the interest has to be paid only for the amount of money borrowed. The line of credit can be secured or unsecured. Generally there are two types of line of credit; one is the personal line of credit and another one is business line of credit.
Difference between line of credit and loan: The line of credit is almost the same thing like a loan but with an added advantage to the borrower. In other words, where the whole loan amount is given to the borrower at a single point of time, the line of credit has the option in favor of borrower to use the credit as and when he requires and this makes it more flexible to use. Since the line of credit is generally secured with some collateral security, the rate of interest in this kind of lending the rate of interest is also low as compared to the loan.
Who is eligible for a line of credit? The line of credit requires that the borrower makes the proper repayment to the lender as per the agreed terms. If there is any default on the part of the borrower than he might lose his property to the lender. This is why this line of credit is advisable for the people who have got a regular source of income.
Line of credit has given a new option to the debtors having a bad credit score since the lender is secured with the collateral provided by the borrower and credit score does not matter much.