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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.
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.
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 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.
There are two types of lines 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.
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.
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.
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.
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.
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 –
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.
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.
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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.
Yes. If you make timely repayments, your credit score will increase and if you delay your EMIs, your credit score will go down.
Different lenders charge different interest rates on a line of credit. At Zype, the interest rate starts at 1.5% per month.
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.