The need for immediate cash can plague anyone, anytime. Though we are prepared for the worst kind of situation with our savings and emergency funds, we do not need to break open our savings every time we need cash. Certain crises can be warded off with instant credit help. During such times, when in need of immediate cash, we first approach lenders for personal loans, use our credit cards or even ask family and friends.
However, there is one type of credit facility that we as individuals never think about. This is called the ‘line of credit’.
What is a personal line of credit and how does it work?
A personal line of credit is a type of unsecured loan, and it is similar to a credit card. Here, instead of a credit card, you are presented with a credit account. This credit account has a fund limit that is made available on the basis of your eligibility. This fund lies in your account and can be withdrawn as and when required and as much amount as required till the funds available are exhausted. The interest is charged only on the money withdrawn and not on the full funds available.
When does a personal line of credit work?
While credit is useful whenever there is a need for cash, a personal line of credit works in the following scenarios:
Irregular Income: If you work as a freelancer or work on commissions etc. where you are not sure of when your paycheck comes in, but you have a list of expenses and bills that need to be paid regularly, then a line of credit account works brilliantly.
Emergencies: An emergency fund requirement like paying off medical bills, sudden payment of fees
Flexible Expenditures: In the case of flexible expenses, for example, you need to make payments of your house remodelling in instalments, you do not need to take a full loan. Instead, you can take a line of credit and withdraw money as and when required, thereby saving on your interest payments.
Some of the advantages of a personal line of credit
· As a consumer, you have the flexibility of choosing the amount of withdrawal depending on the need of the hour. You can withdraw as low or as high an amount, as long as it falls within your credit limit. You can borrow only what you need for the time being and not the full amount.
· As compared to other types of credit, the interest rates for a line of credit are relatively lower, since you will be paying the interest on only the amount withdrawn and not the total fund available
· A line of credit can be used for any purpose, there is no restriction on that
· These are ideal to meet short term cash problems
Some disadvantages of personal line of credit:
· You may need to have an account with the lending institution to get a line of credit account. This may not be the case with a personal loan
· Since the funds are at your disposal, a line of credit usually requires a very good credit score
· There could be a temptation to spend unnecessarily since you have access to surplus funds
The bottom line is that a personal line of credit, as with any financial instrument, is not fundamentally good or bad. It is all about how you, as a consumer, use this type of credit to your advantage.
Facebook Conversations