A type of flexible loan, wherein you borrow money up to a pre-set limit, is a credit line. The funds are not to be used for a specific purpose and can be used in any way. A person can use the amount in the ways that suit them the best. The amount used can be very little or large, but up to a limit. The loan can be paid at any time at the convenience of the loan taker. It works in a way that the loan taker has to pay interest only on the amount of money used and not the total amount of loan taken, and the amount of money can be withdrawn at any time up to the credit limit.
Let’s go through an example to make the concept of credit lines even more straightforward. For instance, if a person takes a credit loan of Rs.50,000, he gets to use this amount per his needs. If the person spends Rs.20,000 out of this amount, he will only be liable to pay interest on this amount and pay back the loan of Rs.20,000 according to the suitable period. The remaining Rs.30,000 will be kept by the bank, and the loan taker does not have to pay any interest on this amount. That is how the line of credit works.
Also, the credit limit is the maximum amount of money that can be used. But a person must pay back his credit each month according to the amount of money set out in the monthly statement, including interest, insurance premiums (if any) and any additional amount required to ensure the account balance does not exceed the credit limit.
A line of credit is followed by a draw period and a repayment period. It is when you have access to credit, wherein you can borrow and use the money. Depending on the person’s agreement details with the lender and the issuer’s credit loan history, this period might last.
A few reasons to avail of a credit loan are as follows:
- A person running a seasonal business
- If the customer’s payment duration is long
- To buy regular inventory or materials
- To attain financial flexibility
The line of credit is divided into three categories: instalment, revolving, and open credit. Each of them is borrowed and repaid with different structures and interests.
A loan offers the borrower a fixed or infinite amount of money. In instalment credit, the credit is aware of the amount of money he has to pay monthly as a credit payback. A few examples include student loans, personal loans and mortgages. An agreement in which the account holder is permitted to borrow money repeatedly up to the limit set, along with repaying a portion of the current balance due in regular payments, is a revolving credit. Each cost, deducting the amount of interest and fees charged, is the amount available to the account holder.
An open credit, similar to revolving credit, is an arrangement between the borrower and the lender, allowing the latter to access credit repeatedly, up to a specific amount.
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