Line Of Credit Details

A line of credit is a standing credit limit or borrowing limit allowed to the businesses or individuals. This limit is calculated based on their credit history, income projections as well as their relationship with the bank over a period of time. This type of credit availability is a boon to the business organizations as well as individuals as it lets them meet their obligations as and when required by borrowing the required amount. The interest is charged only on the amount borrowed and not the entire credit limit. This thereby eases the burden of repayment as well as interest expense on the borrowers.

Line of credit is best explained as a continuous loan availability where the borrower can withdraw the amount needed from the available limit, pay the same and get the limit renewed. It is like a continuous loan cycle which does not burden the borrower nor does it burden the system with the risk of NPAs.

Types of Line of Credit available to borrowers

There are two types of line of credit available to the borrowers depending on their needs and factors like interest payment and security and more. These types of loans are discussed below.

Secured Line of Credit

Under this line of credit, the loans or funds available to the borrowers are secured in nature. This means that credit is available against some collateral or security to be provided by the borrower. The rate of interest in this type of credit is lower as they are secured in nature. Banks and financial institutions consider the income projections of the borrower to determine the credit availability that can be availed by the borrower.

Unsecured Line of Credit

This line of credit is available to the borrowers without any need to provide any collateral or security. The rate of interest charged on this type of line of credit is higher as compared to the secured line of credit.

This is the broad classification of the line of credit available to the borrowers. Further specific types of lines of credit available to the borrowers are discussed below.

Revocable line of credit

This line of credit has all the usual characteristics of such a type of financing option and can be both secured as well as unsecured. The main point of difference in this case is that the credit can be revoked or withdrawn by the lender at any point of time at its discretion or under certain specific conditions. Such situations or circumstances may include the change in the financial viability or creditworthiness of the borrower or on account of any change in the lender’s policies or adverse market conditions.

Revolving line of credit

This is the most common form or the most popular form of line of credit available to the borrowers. Under this type of line of credit, the borrowers can get the money that is permissible to them, pay them back and then avail the limit again. It is virtually an unending cycle and benefits the borrowers in many ways. Such lines of credit are like an open ended credit account where the borrower can borrow any amount within the permissible limits and is charged interest only for that amount.

Non-Revolving line of credit

It is essentially the same type of line of credit like the revolving line of credit, however, they have one major difference. The non-revolving line of credit does not reload upon repayment of the borrowed amount. The account of the borrower is closed once the full payment is made for the amounts borrowed.

Advantages of Line of Credit

Some of the advantages of the Line of Credit available to the borrowers are highlighted below.

• Borrowers can get loans for much reduced amounts as compared to traditional lenders that have set limits for minimum amounts that can be disbursed as loans.
• Interest is charged only on the amount borrowed from the credit available. This reduces the burden of repayment of the interest on the total amount of credit available.
• The assurance of a standing line of credit available to the borrowers can give the borrowers the peace that they need in order to focus on the operational part of business.
• The credit limit available to the borrowers is also higher as compared to many other loan products.

Risks or Limitations of Line of Credit

There are many risks involved and many limitations of a line of credit facility available to the borrowers. Some of such risks or limitations are mentioned below.

• The rate of interest on unsecured line of credit is much higher as compared to secured line of credit or the traditional loan products available in the market.
• The rate of interest on this type of credit varies from lender to lender and is not fixed in nature.
• The penalty for non-payment of dues or late payment of dues for this type of credit is quite higher as compared to credit card dues or any other form of loans.
• The open ended nature of the line of credit may not be suitable for borrowers that tend to overspend.
• The credit score of the borrower can be greatly damaged over misuse of the line of credit.

FAQs – Line of Credit