A Deep Dive into the Concept of a Personal Credit Line

Jul 2018 | Team Rubique

A personal line of credit is a flexible monetary option that allows you to borrow the number of funds that you need, whenever you need it. It is a pool of money that is released at once but can be borrowed in parts based on requirement.

A credit line addresses short-term needs and immediate liquidity requirements. A clean credit history is the main eligibility criteria required to avail funds from a credit line. To find out your eligibility, you can check your free CIBIL score online.

Obtaining a Personal Line of Credit

Digitization has made the process of obtaining a personal line of credit extremely convenient. Nowadays, banks have their own websites through which it is easy to obtain a personal line of credit.

Further, mobile applications are making credit lines accessible to millions of consumers with just the click of a button. These apps connect to various banking systems, evaluate the user’s creditworthiness and provide instant approvals for amounts up to INR 5 lakhs instantly.

For example, if an individual has sanctioned INR 3 lakh and he uses INR 1 lakh, interest is only charged on the INR 1 lakh. The borrower is eligible to withdraw the remaining 2 lakh when required, either in parts or as a whole.

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Personal Line of Credit Versus Other Forms of Credit

While credit lines and other forms of credit have a few similar features of borrowing, they are set up differently. From tenure to repayment, these options diverge on several characteristics.

Loans

The biggest difference between loans and credit lines lies in the way the funds are paid out to the borrowers. Under a traditional loan, a large sum of money is handed over up front. However, credit lines fall under the category of revolving credit. Instead of taking out all the funds at once, the borrower has the option to withdraw as much as he needs which is restricted to the borrower’s eligibility limit.

Interest rates are another point of dissimilarity. Personal loans have a lower interest rate than personal lines of credit. Further, the interest rates on lines of credit are dependent on the creditworthiness and repayment capacity of a borrower. This makes the rate variable in nature.

Repayment is the third factor to consider when evaluating between a personal loan and a personal line of credit. With a personal loan, you need to repay a fixed amount within a set period of time. However, the repayment schedule of a credit line does not have a defined time frame. It is more flexible and only the interest portion needs to be made each month. The principal amount becomes due at the end of the tenure.

Credit Card

Credit cards are one of the most widely used forms of credit. Credit cards and credit lines are both unsecured forms of lending. However, in comparison with lines of credit, credit cards have a higher rate of interest.

Also, most credit card companies charge annual fees while this concept is not applicable on a personal line of credit. Another point to note is that with a credit line, you can withdraw an advance of up to 100% of your eligible amount. However, most credit card companies restrict cash advances to 20% and also charge a fee on the amount advanced.

The Role of CIBIL Scores in Credit Lines

Though lines of credit are extremely useful to solve short-term finance requirements, they come with their own set of shortcomings. One disadvantage is that banks have the right to lower your borrowing limit or cancel your line of credit at any time. This can make the dependency on credit lines risky because you may not get funds when you need it the most.

Further, while unsecured lines of credit have lower costs than other forms of unsecured loans, they are more expensive than secured loans. This is because banks are exposed to a higher degree of risk due to the lack of collateral. The unsecured nature of credit lines results in a stringent credit evaluation process. So, people with low credit scores on their credit report may face great difficulty in availing an unsecured line of credit.

To avail your CIBIL report online, a few basic details such as your name, address, phone number, and personal identity proof like PAN or Aadhar card are required. This report contains details about the credit you availed till dates such as home loans, credit card bills, and overdraft facilities. However, it doesn’t track information about your savings or deposits. It only monitors your short term and long term liabilities.

A CIBIL score is a three-digit numeric summary on your CIBIL Report that reflects your credit behavior. The usual range for a credit score is between 300 to 900. While a bad credit score starts at 300 and is indicative of a poor credit history, the perfect score to aim for is 900. The optimum level that you should generally aim for is 700 or above.

Factors such as your history of repayments, recent loans were taken, amounts outstanding on your existing debt, and credit mix between secured and unsecured loans affect your CIBIL score. This score can be improved with timely repayments and a stable portfolio.

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When Should You Choose to Avail a Personal Line of Credit?

Credit lines are the best option for monetary requirements recurring over a period of time. However, if you need a large sum of money at once, then a personal loan is a better choice than a personal line of credit.

Similarly, if you need a low credit limit and don’t anticipate a cash advance requirement, then a credit card is a good option. But if your fund requirement is high and you need a longer repayment period, then a credit line will serve your purpose.

 A Comprehensive Evaluation

Applying for a personal line of credit is dependent on your credit score and your repayment capacity. With the free CIBIL score online, you can assess your financial status and estimate your eligibility of funds.

Ultimately, there is no form of lending that suits all types of situations. However, a personal line of credit is a good funding option for informed buyers who are responsible with their repayments.