Line of Credit | How it works | Personal loan or Overdraft Comparison

A line of credit is a preset amount of money that a financial institution like a bank or NBFC has agreed to lend you. You can draw from the lines of credit when you need it, up to the maximum amount. You’ll pay interest on the amount you borrow. Once you pay back borrowed funds, that amount is again open for you to borrow. Flexibility is the key here. You can choose when to take out the money, pay it back and repeat as long as you stick to the terms, including paying off what you borrow on time.

How does Line of Credit Work?

Lines of credit gives you access to a set amount of money that you can borrow when you need it. But you don’t pay any interest until you actually borrow. There are business lines of credit. Business lines of credit are usually unsecured, meaning you don’t need to use collateral to take out the lines of credit. 

When you apply for a line of credit, having better credit scores could help you qualify for a lower annual percentage rate. Some lines of credit may come with fees, such as an annual fee, and limits on the amount you can borrow. After you qualify for the lines of credit, you’ll have a set time frame, known as the “draw period” in which you can draw money from the account. Once you borrow money from your lines of credit, interest usually starts to accrue and you’ll have to start making at least the minimum payments, the amount of which will be added back to your available lines of credit as you make them.

Personal Loan vs Line of Credit

Personal loans are sometimes called trademark loans. This is because you can receive the loan with just your signature. Because the loan is unsecured, you don't have to put up any assets or collateral, such as a home or vehicle, to secure financing.

Lines of credit, on the other hand, behave like credit card accounts. You can borrow, pay down your balance and access your available credit line again and again. Like a personal loan, you may be able to qualify for an unsecured personal lines of credit with just your signature. However, if you secure your lines of credit with an asset, you may receive a better interest rate. The main difference between the two is that lenders may require your credit to be in better shape to be approved for lines of credit.

How Line of Credit Differs from Overdraft

Overdraft facility is credit funding offered by banks to individuals and companies to withdraw money from the banks in which they have accounts, even if their account balance is low, zero or below. Lines of credit and Overdraft are referred to as a credit limit sanctioned by the lender. 

• The interest rate is lower as compared to Overdraft

• Lines of credit amount is based on the volume of stocks and inventory

• Cash credit loans can be availed by individuals, retailers, traders, manufacturers, distributors, companies, partnerships, sole proprietorships, LLPs, etc.

• Lines of credit is sanctioned based on the business performance and market situation