Emergency Money – What’s your best option among a line of credit, a personal loan, a credit card?
With the increase in Covid cases, and as we sink deeper into this pandemic, people face different kinds of challenges and hardships, one of the biggest being financial stress. The second wave of the pandemic and the lockdown that followed once again impacted the financial well-being of businesses as well as the working population. Sudden expenses occur almost every two months and most have not planned or prepared.
As limited finances force people to take credit, it is also important to analyze the financing options available and plan accordingly. There are also different ways to do it, starting with a line of credit (LOC), personal loan, money borrowed by credit card, etc.
Similar to a credit card loan, a Line of Credit (LOC) is a predefined borrowing limit that can also be used 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 as needed. Interest will only be charged on the amount borrowed and as the money is repaid it can be borrowed again in the case of an open line of credit.
How is a line of credit different from a personal loan or credit card loan?
The LOC is more like a credit card than a personal loan. The difference is that lines of credit usually come with more flexible options for converting funds into a loan, giving the borrower the ability to repay them over a long period of time compared to a credit card. Chopra says, “Compared to a line of credit, loans have a non-revolving credit limit, which means the borrower only has access to the loan amount once. But in a line of credit, the borrower has ongoing access to funds and can access them as needed until they are active.
In addition, by choosing a line of credit, there is no obligation to use it. Borrowers can pay it off as and when they are used.
Objective of the LOC at the present time
Industry experts say a line of credit offers built-in flexibility in when and how much to borrow and how and when to repay. One of the great advantages here is that once the borrower has repaid the amount, they have the option of withdrawing or borrowing funds again as many times as needed. Since consumers only pay for the funds they actually use, experts say a line of credit can prove to be more affordable in the end.
Chopra adds: “Given the current situation, a line of credit would be the ideal choice because it gives you the flexibility to use funds as and when needed (and only pay for what you use and when. ) without having to request it. several loans. A line of credit is an appropriate option to compensate for a temporary cash flow shortage that many people may find now. “
Advantages and disadvantages of the LOC compared to a personal loan
- Borrowers can access funds as and when needed, even multiple times within their capacity at no additional cost.
- The line of credit offers flexible repayment options to borrowers.
- The line of credit only charges interest on the amount used by the borrower, not the entire line.
- A line of credit can be approved once and used over a long period of time.
- It also helps build your credit score.
- Annual or monthly maintenance fees may be charged to the borrower.
- Applying for a line of credit requires a good credit rating to qualify.
- Interest rates are variable and can sometimes be slightly expensive than a personal loan due to the flexibility offered by the product.
- Line of credit is not offered by all financial institutions and the borrower may require to have an account with the lender.
Eligibility criteria to opt for a Line of credit;
While opting for a line of credit, the borrower must have a solid credit history to qualify for it.
- Credit Score: Lenders often have higher credit score requirements for a line of credit compared to a personal loan. A credit score of 700+ is required when applying for a line of credit. A higher credit score can also help you negotiate favorable terms.
- Payment history: the borrower must have an established history of timely payments that demonstrates they are a responsible borrower
- Financial Status: A decent debt-to-income ratio, cash and equity are factors that determine the financial condition of the borrower, thus reflecting their ability to repay their debts.
Chopra adds, “As part of the line of credit application process, the lender can thoroughly investigate the borrower’s credit reports, which may temporarily lower their credit rating by a few points. Apart from this, if the borrower makes late payments, it can also negatively impact their credit rating.