Line of Credit vs. Personal Loan: Understanding the Key Differences

A line of credit is a flexible loan that banks offer to individuals with a good credit history, allowing them to borrow funds up to a predetermined limit. You may wonder why someone with a good financial standing would need a loan. The answer is simple – even those with a stellar credit history may experience unexpected expenses or situations that require immediate access to funds. That’s where a line of credit can be helpful. Let’s explore this financial term in detail.

What is a line of credit?
 

A line of credit (LOC) is a form of unsecured personal loan that allows you to borrow money when you need it, pay it back, and borrow more without having to qualify for another loan. When you take out loans from your line of credit, interest typically accumulates. You must make minimum payments, the amount of which will be transferred back to your allocated line of credit as you make them. When your draw period finishes, you can begin the repayment schedule, during which you will have some time to pay off any outstanding amounts. However, making minimum payments may end up costing you more in the long run in terms of interest.

Check your credit ratings and take actions to enhance your credit health before taking up a line of credit. A good credit history enhances your prospects of applying for a reduced interest rate. Once you’ve worked on your credit, analyse how much money you need and how you intend to spend it.

How do lines of credit differ from personal loans?
 

Let‘s start with how you can borrow money. The usual practice is – you apply for an instant personal loan. Once approved, you receive a lump sum of money. You must begin paying interest right away, regardless of when you spend it.

A line of credit works in a similar way. It gives you access to a specific amount of money that you can borrow as needed. However, you do not pay interest unless you start borrowing. In this article, we’ll focus on lines of credit which are typically unsecured, i.e., you do not need any collateral against it.

Importance of having a good credit score before applying for a line of credit
 

Better credit ratings may help you qualify for a line of credit with a lower annual percentage rate. Some credit lines also have fees, such as an annual charge, and limits on how much you can borrow. After you have been approved for the line of credit, you will have a specified amount of time during which you can withdraw funds from the bank. When you are prepared to borrow money, the bank may issue you special cheques or a card or transfer the funds to your bank account.

Why is FIRSTmoney a superior line of credit offering?
 

IDFC FIRST Bank’s FIRSTmoney, an industry-first offering, is a more efficient, flexible, and customer-centric alternative to a regular line of credit. You can now get an approved limit of up to ₹10 lakhs with the facility of unlimited withdrawals and zero foreclosure charges. The funds can be withdrawn when you like, and you pay EMIs only on the used amount.

Furthermore, with FIRSTmoney, you get convenient tenure options ranging from 2 months to 5 years to repay the borrowed amount. This means that you can effectively manage your finances while securing the required funds for your expenses! In addition, FIRSTmoney’s zero foreclosure charges make it one of the most affordable options for varying needs such as planning trips, wedding costs, urgent medical expenses, home improvements, and more without paying any extra charge to close your loan early.

Lastly, if you have a decent credit score of 750 or more and earn a stable income, applying for a FIRSTmoney loan is a breeze! All you need is your physical PAN card to complete the video KYC process while submitting your application online. 

Conclusion
 

So, while a line of credit does offer more flexibility as compared to a standard personal loan, IDFC FIRST Bank’s FIRSTmoney ultimately proves to be an even higher upgrade given its favourable terms. You can withdraw the required loan amount from your approved limit to deal with any expenses, choose from a flexible tenure range, and even comfortably foreclose the debt without worrying about incurring any charges!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.