With the surge in Covid instances, and as we sink more into this pandemic, folks are facing distinctive sort of challenges and troubles, one of the largest getting economic strains. The second wave of the pandemic and the subsequent lockdown has but once again impacted the economic wellbeing of organizations as nicely as the working-class population. Sudden expenditures arise practically every single alternate month which most have not planed or prepare for.

While restricted finances are forcing folks to opt for credit, it is also essential to analyse the financing choices out there and strategy accordingly. There are also many techniques one could go about it, beginning from Line of Credit (LOC), private loan, funds borrowed from credit card, and so forth.

Similar to a credit card loan, a line of credit (LOC) is a preset borrowing limit that can also be employed at any time. Gaurav Chopra, Founder and CEO of IndiaLends says, “When a borrower applies for a Line of Credit, the borrower can draw up to a certain amount on an as-needed basis. The interest will be charged only on the amount borrowed and as money is repaid, it can be borrowed again in the case of an open line of credit.”

How is the line of credit distinctive from a private loan or credit card loan?

LOC is more comparable to a credit card than a private loan. The distinction is that credit lines generally come with more versatile choices to convert the funds into a loan as a result providing the borrower flexibility to repay them more than a lengthy tenure as compared to a credit card. Chopra says, “As compared to a Line of Credit, loans have a non-revolving credit limit, which means the borrower has access to the amount loaned only once. But in a Line of Credit, the borrower has continuous access to the funds and can access it as and when the need arises till the time it is active.”

Additionally, when opting for Line of Credit, there is no obligation to use it. Borrowers can spend for it as and when they use it.

Purpose of LOC in present instances

Industry specialists say the line of credit supplies constructed-in flexibility on when and how a great deal to borrow and how and when to repay. One of the large positive aspects right here is that after the borrower repays the quantity, he/she has the alternative to withdraw or borrow funds once again, and as quite a few instances as required. Since customers only spend for the funds they really use, specialists say a line of credit can prove more cost-effective in the finish.

Chopra adds, “Given the current situation, a line of credit would be the ideal choice as it gives you the flexibility to use the funds as and when the need arises (and pay only for what you use and when) without having to apply for multiple loans. A line of credit is an apt option to compensate a temporary cash shortage which might be the case for a lot of people presently.”

Pros and cons of LOC as compared to a private loan

Pros

  • Borrowers can access the funds as and when they will need it, even several instances inside their limit without the need of any further charge.
  • Line of credit delivers versatile repayment choices to the borrowers.
  • Line of credit charges interest only for the quantity utilized by the borrower and not for the whole line.
  • Line of credits can be authorized after and employed more than a lengthy tenure.
  • It also aids create your credit score.

Cons

  • There could possibly be some annual or month-to-month upkeep costs charged to the borrower.
  • Applying for a Line of Credit needs a very good credit score to qualify.
  • The interest prices are variable and occasionally might be slightly high priced than a private loan due to the flexibility supplied by the solution.
  • Line of credit is not supplied by all economic institutions and the borrower might need to have an account with the lender.

Eligibility criteria for opting for a Line of credit

While opting for a Line of credit, the borrower demands to have a strong credit history to qualify for one.

  • Credit score: Lenders generally have greater credit score needs for a Line of Credit as compared to a private loan. A credit score of 700+ is essential when applying for a Line of Credit. A greater credit score can also assist you negotiate for favourable terms.”
  • Payment history: The borrower need to have an established history of timely payments which demonstrates him to be a accountable borrower
  • Financial situation: A decent debt-to-earnings ratio, money on hand and net worth are some things that establish the economic situation of the borrower, thereby reflecting their capability to spend back debts

Chopra adds, “As part of the application process for a Line of Credit, the lender may perform a hard enquiry on the borrower’s credit reports which may temporarily lower their credit score by a few points. Other than that, if the borrower makes late payments, that may have a negative impact on their credit score too.”


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