Line of Credit Meaning: Understanding the Basics & Types

There are many times in life when you find yourself short of money. In such instances, there are many ways of arranging money like borrowing from friends and family, using savings amounts, etc. 

One of the best ways to smoothly sail through such situations without affecting your savings is a line of credit. In this blog, we will learn about the meaning of line of credit, every thing you should know about it and the dos and don’ts to make the most out of this loan instrument.

What is a Line of Credit?

A line of credit is a credit facility offered by banks and other lenders. In this, you can borrow money up to a certain amount which is your credit limit. You can take as many loans as you want from your line of credit and you only pay interest on the amount you borrow. Consider it like a financial safety net to help you deal with immediate money needs.

How is Line of Credit Work?

Now that we know what is a line of credit, let’s find out how it works. A line of credit is similar to a credit card. You get a credit limit based on your credit profile. Whenever you need money, you can borrow the amount of your choice from the line of credit and transfer money to your bank account. You can then pay the amount over time in EMIs along with interest. Once you make the repayment, your line of credit is replenished.

For example – With Zype, users can take multiple loans from their line of credit up to ₹5,00,000 personal loan and repay in flexible EMIs of 3, 6, 9 and 12 months. Every time you make an EMI payment, your credit line will be replenished with the repaid amount.

Also Read : How to get instant loans from your Zype Credit Line

Types of Lines of Credit (LOC)

There are two types of lines of credit 

1. Secured Line of Credit

When you get a line of credit by pledging a collateral, it is called a secured line of credit. For example – In a Home Equity Line of Credit or HELOC, the borrower’s property is submitted as collateral to avail the line of credit. In this, the limit of the line of credit would be based on the property’s market value.

2. Unsecured Line of Credit

Here, the borrower gets a line of credit without providing any collateral. The interest rate charged is higher than a secured line of credit. This is because there is no pledged security and riskier for the lender. You can get unsecured line of credit up to ₹5,00,000 from Zype. 

Advantages of a Line of Credit

1. Serves as a Financial Cushion

You can instantly borrow money from your line of credit anytime, anywhere. 

2. Take Small Loans

You can take multiple loans as per your needs. From a Zype credit line, you can withdraw as low as ₹1,000.

3. Flexible Repayment Tenure

You can repay your loans in convenient EMIs.

4. Hassle-Free

Once your credit line is active, you can withdraw money anytime without needing to give more details or completing additional paperwork.

Things to be Careful When Using Line of Credit (LOC)

1. Avoid Making Unnecessary Spends

You should never forget that the amount you withdraw from the credit line is a loan and you would need to pay it back with interest. Hence, you should only use the credit line for necessary expenses and avoid indulging in impulsive spending.

2. Be Mindful of Your Line of Credit’s Interest Rate

If you are a borrower with a low credit score, there might be a higher interest rate associated with your line of credit. In such situations, you should only borrow from the line of credit when necessary.

3. Be Responsible while Using line of Credit

If you fail to repay EMIs on time, it would bring down your credit score and would make it difficult for you to borrow money in future. Using your credit line irresponsibly can negatively impact your credit profile.

What is the Repayment Procedure of Line of Credit?

After you have taken a personal loan from your line of credit, you will have to pay back only the borrowed amount with interest. Your payment due date and EMI amount will be according to the terms of borrowing agreed by your lender and you.

Here’s an example to understand this better:

Consider you have an available line of credit of ₹1 lakh and take out ₹40000 out of it. You will have to pay back only ₹40000 with interest according to your personal loan repayment plan.

Application Process for Line of Credit

Completing your application process for a line of credit is an extremely simple procedure. All you have to do is provide your personal information and documents required by your lender. After you have completed your application, the lender will assess your profile and approve you for a line of credit.

The increase in the number of loan apps have further made this process easier. You can skip lengthy applications and the need to physically go to the bank to get access to the money you need.

Steps to Apply for a Line of Credit

The steps of applying for a line of credit are similar across lenders – You submit the necessary details and documents, the lender checks your credit profile and generates a credit offer for you. 

Let’s understand this better by exploring the process of activating the Zype credit line –

  1. Install our instant loan app from the Google Play Store or Apple App Store
  2. Create your account and add basic details like name, mobile number, PAN number and employment details.
  3. Based on these details, Zype will generate a credit offer for you in less than 60 seconds.
  4. After this, complete the KYC process to unlock your line of credit.
  5. Now your credit line is ready to use. You can select the loan amount and EMI plan and transfer money to your account.

How to Manage your Line of Credit 

It’s very important to responsibly manage your line of credit. Avoid using the line of credit for non-essential items or impulsive purchases.

Before borrowing money from the line of credit, make sure you have read and understood all the important terms like interest rate, processing fee, repayment tenure, etc. Lastly, you should never delay or default on EMIs as it will reduce your creditworthiness and make it difficult for you to get loans at a low-interest rate in future. 

Conclusion

Hope this blog helped you to understand the meaning of line of credit and other important details. A line of credit is a great loan instrument when used responsibly. 

You can activate Zype’s line of credit in less than 8 minutes and get loan approval in 60 seconds. Once your Zype’s line of credit is activated, you can take as many loans as you want from your credit limit. Click here to Download Zype App and get a line of credit up to ₹5,00,000. If you want to learn more about Zype’s line of credit, click here.

Frequently Asked Question

How Do I Repay A Line Of Credit?
You can repay the amount borrowed from a line of credit in flexible EMIs. For example – Zype gives an option to choose from 3, 6, 9 and 12 EMIs.
Can A Line Of Credit Impact My Credit Score?

Yes. If you make timely repayments, will increase  your credit score and if you delay your EMIs, your credit score will go down.

What Is The Interest Rate On A Line Of Credit?
Different lenders charge different interest rates on a line of credit. At Zype, the interest rate starts at 1.5% per month.
What Are The Common Uses For A Line Of Credit?
Money borrowed from an unsecured line of credit can be used for a variety of purposes like medical emergencies, home renovation, vacation, wedding, education, etc.
Is It Worth Getting A Line of Credit?

Yes, it’s worth getting a line of credit. It will not only help you meet any of your immediate financial needs, but also be an available source of money for the future.

Is There A Specific Limit That I Can Borrow Up To In Line Of Credit?

The limit set on your line of credit depends on various factors like your credit score, repayment history, monthly income and even the capacity of the lender.

Can I Use A Line Of Credit For My Start-Up?

Yes, you can. There is no restriction on the end usage of a line of credit, you can use it anywhere you like.

How Do I Choose The Right Lender For A Line Of Credit?

When taking a line of credit, it’s important to choose a legitimate lender who follows all the regulatory practices of the RBI and gives you the best loan offers.

What's The Difference Between Loan And Line Of Credit?

A loan is the money borrowed once for a specific financial requirement. However, a line of credit is an available source of money that you can borrow from whenever you need.

What Is The Purpose Of A Line Of Credit?

A line of credit is an available source of money that can help you meet any of your financial needs. You can withdraw money from it whenever you want and pay interest only on the borrowed amount.

Is Line Of Credit Risky?

No, it’s not. As long as you have a budget for repaying the borrowed amount and are taking a line of credit from a genuine lender that follows all the regulatory practices of the RBI, there is no risk associated with taking a line of credit.

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