A line of credit is an amount, which is preset by a bank or non-banking finance company and they have agreed to lend you based on your credit history. You can withdraw as much amount as you require till the time the amount is within the credit limit. You will have to pay the interest on the borrowed amount and not the whole line of credit. If you are having cash flow problems or you want to start a business or renovate your home or buy something expensive, and you don’t have collateral, you may consider a line of credit.

How Does It Work?

Line of Credit works almost similar to a credit card. You have the freedom to choose when to use the funds. The interest rate for a line of credit is comparatively lower than that of a credit card. Additionally, a line of credit comes with a much higher credit limit as compared to that of a credit card. In a line of credit also, you will receive a monthly statement stating your balance, minimum payment due, any fees and summary of interest. If you withdraw the money, you have to repay that particular amount with the applicable interest.

Types of Line of Credit

There can be many reasons to apply for a line of credit. It depends on your financial condition and history. It can be used in multiple ways, like paying during an emergency, bridging the financial gap, save for the college admission and tuition fee, etc. In a number of cases, a credit line is a much better option than going for a credit card or personal loan for large purchases.

Secured Line of Credit: 

A secured credit line requires collateral, such as home, policies, or other valuable assets. It comes with a much less rate of interest, as it is less risk for the lenders.

Unsecured Line of Credit:

This line of credit doesn’t require any collateral. This makes it a high risk bet for the lenders. Due to this, applying for an unsecured line of credit is difficult and you should be having a high credit score. It also has a higher rate of interest as compared to the secured line of credit.

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Applying for a Line of Credit

When you apply for a credit line, lenders will check how creditworthy you are, which can be known by your credit score and your ability to repay the loan. A good credit score will get you a lower rate of interest for a line of credit. It also increases your borrowing limit. Follow these steps when you are applying for a credit line:

Credit Report Review

There are many questions that need to be answered first, what is your credit score? When did you check your credit score last? Are there any errors in your credit report? Any overdue account? Any closed credit account that was not closed properly? Before you head to your bank to apply for a credit line, you should know about your credit history. You can check your credit score and report for free at Indialends in just one minute.

Gathering Financial Records

Banks and non-banking financial companies will look at your salary, your residence, the field of occupation, and the company you work for, along with many other factors that could serve as advantage or disadvantage for you getting approved for a line of credit. You will require submitting copies of past tax returns, any investment, information of your employer, bank statements, etc. when you are applying.

Make sure to thoroughly check these points before applying for a line of credit and that all your financial paperwork are complete and in order. You can also negotiate the terms and conditions along with the rate of interest that you are being offered. Compare these terms between various lenders before deciding on the lender where you wish to apply for a credit line.

A credit line can be a smart option for various situations, like when you are unable to pay off the bills or you want to renovate the home or you want to clear another debt with a higher rate of interest, etc. However, you should look into your financial situation carefully before taking any form of credit. Apply for the amount that you think you will be able to repay easily. Do not put yourself in unnecessary burden. If you borrow the money correctly and be cautious while repaying it, you will be leading a hassle-free life as far as finances are considered.

Previous Article: Why You Should Build An Emergency Fund

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