Line of Credit: How it works and how it differs from personal loan or overdraft

Some lenders also offer credit lines through cards where the sanctioned credit limit is credited to the card.

If you have a bank fixed deposit, and you are falling short of funds, there’s no need to break the deposit. Instead, you may opt to take an overdraft against your fixed deposit. An overdraft facility can be availed against most of your investments such as gold mutual funds etc. But, what if you do not have any such assets or investments that may fulfill the need of funds at short notice. In such a case, you may opt for a personal loan or even a Credit Line.

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In a personal loan, you will have to keep repaying the EMI while in a Line of Credit, you may just require to service the interest and pay the principal later. OD is similar to Credit Line but in the latter, you don’t have to avail it against any investment.

“Credit line loans and overdraft facilities have several similar features. Both options come with pre-sanctioned credit limits, up to which borrowers can borrow multiple times during the sanctioned period. Both of these facilities also allow borrowers to repay as per their repayment capacities, without attracting any prepayment charges,” says Gaurav Aggarwal – Senior Director & Head, Unsecured Loans, Paisabazaar.com

What makes OD and Credit Line kind of loans attractive is the repayment option. “As far as the interest cost is concerned, borrowers incur interest cost only on the borrowed amount until it is repaid, and not on the sanctioned amount,” informs Aggarwal.

“In the case of credit lines, some lenders require borrowers to repay in the form of EMIs, including both principal and interest components,” adds Aggarwal.

Overdraft facility is a common feature extended by banks generally to their current account holders such as businessmen, corporates and SMEs. Of late, several Fintech companies have started offering Credit Line facilities even to individuals. “Fintech lenders offer secured as well as unsecured credit line facilities. The unsecured credit lines are usually offered to the salaried applicants on the basis of their credit score and monthly salary,” says Aggarwal.

Rate of interest in Credit Lines is generally lower than what one has to pay in credit cards. One may avail Line of Credit and get the amount in their credit cards too. “Some lenders also offer credit lines through cards where the sanctioned credit limit is credited to the card, which then can be used at ATMs for making cash withdrawals, swiped at POS for making offline transactions or used for making online transactions, ” adds Aggarwal.

Before availing Credit Line, evaluate the need and the time period for which you require the funds. Personal loan may be available to you at a lesser cost. “Credit line facilities usually have higher interest rates than the personal loans,” says Aggarwal.

Here are some cues from Aggarwal to decide whether to go for personal loan, Overdraft or Credit line – On the positive side, the higher repayment flexibility offered through credit line facilities makes them more suitable for those facing frequent cash flow mismatches. However, such consumers can also consider overdraft facilities offered by banks though their savings, current or salary accounts, if those facilities cost them lower interest cost than credit line facilities. They can also consider personal loans offered by some lenders in the form of overdraft facilities.