When there is a temporary cash flow problem, a personal line of credit helps households and businesses with ready access to cash. When there is an emergency or short-term income drop, a personal line of credit helps stabilize the budget.
So, What Is a Personal Line of Credit?
A personal line of credit is an unsecured loan that banks, NBFCs and other financial institutions offer to a borrower to use it on demand/need to basis, up to a predetermined credit limit. In many ways, a personal credit line operates very much like a credit card. Both are revolving lines of credit, allowing access to funds when needed. You need to repay what you have used and can use the credit for as long as the account remains open.
Having a personal line of credit has several advantages. Here is a list of them.
- Cheaper than using a credit card: Although credit cards are similar to personal lines of credit, they hold an unusually high-interest rate. With a personal line of credit, you’ll hold the same purchasing power, but at a lower interest rate.
- Makes cash available quickly: Compared to other types of credit, a personal line of credit can be processed in as little as 24 hours. If you are approved, the money is usually accessible to you within a few days, unlike other forms of loans.
- An unsecured line of credit: A personal line of credit is an unsecured loan that can be used as you please. If for whatever reason, you are unable to make a payment towards your credit line, you are not at risk of losing important assets, like your home. Your credit score takes a hit because of the default, but your assets remain safe.
- Offers a lot of flexibility: With a personal credit line, there are no restrictions on how to use the funds. You can use it for business, medical treatments, shopping, home renovation projects, education, wedding, or any kind of emergencies. You can borrow as little as you want or as much as your approved credit limit.
- Interest is charged only on the amount you use: Although the whole credit limit is available to use, the interest is charged only on the amount you withdraw from the credit line. This means if you don’t withdraw from your credit line, you will not be charged any interest.
- Credit is available whenever you need it: Once you are approved for a personal line of credit, you can use the same credit (reuse) as many times as you need it, while ensuring that you are repaying what you borrow. This credit line is active forever, and that’s the best feature to have when dealing with a financial emergency.
- Fills in the financial gaps: A personal line of credit works great for people who work on a commission basis or are freelancers. Instead of resorting to other expensive forms of credit to cover the income shortfalls (due to inconsistent income) needed to pay bills and other expenses, a credit line works effectively to fill the financial gaps and stabilize the budget.