Cash crunches at month ends are an inescapable situation for many. There are even situations when you are in need to buy something expensive but can not do so even after lots of planning and saving for months. Well, these things have no solution for it until you increase your income. But, coming to the fact- you can’t multiply your income overnight, and even following money management skills takes years to reflect it in your bank account.
Then what can be the solution to your short-term cash crunches? Can it be borrowing from your friends and family or going for a personal loan? Both of these will not work here as no one can lendforall you money several times and availing of a personal loan whenever you need money is not possible. Then what can be the solution to this?
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Personal Line of Credit!!
A line of credit is a type of borrowing only where the borrowed amount can be used as a credit card. While opting for a personal line of credit one is free to withdraw the credit as per his/her needs without any restriction.
When one opts for a line of credit they get a particular amount sanctioned on their name, from which one is free to withdraw money as per their requirement. The interest rates on lines of credit are generally lower than personal loans and credit cards. Moreover, the interest is charged only on the amount used. All these features make the line of credit more convenient and affordable for users. From paying bills or adding some cash to your monthly budget a line of credit can be used for multiple purposes.
Why Choose Line of Credit?
- A personal line of credit allows you to withdraw money anytime you want from the money sanctioned to you.
- Interest is charged only on the amount used which reduces your EMI burden.
- The interest rate for a personal line of credit is comparatively low as compared to the interest rate of an online personal loan.
- A line of credit offers flexibility to users which is its main advantage.
How does a Line of Credit Functions?
When someone opts for a line of credit, he/she gets a certain amount in their LOC account, but unlike loans, they do not have to use it all at once. The borrower is free to tailor their spending from the LOC to their needs. Moreover, what makes LOC even more attractive to the customers is- the borrower owes interest only on the amount they draw, not on the entire credit line. Additionally, borrowers can adjust their repayment amounts as needed, based on their cash flow and affordability.
Few Drawbacks of Lines of Credit
A personal line of credit can be more beneficial to those who meet cash crunches on and off. However, the main advantage of a line of credit is the ability to borrow frequently and avoid paying interest on a large loan. But, it is wrong if we say a line of credit has only advantages and no disadvantages/drawbacks. So, let’s now focus on some of the drawbacks of it.
- Credit Line (Unsecured) comes at higher interest rates than secured loans.
- Interest rates for lines of credit vary widely from one lender to another.
- Line of credit does not provide the same regulatory protection as credit cards.
- One major drawback is – if not used wisely, a line of credit can invite overspending habits which can further lead to debt traps.
- Misusing a line of credit may hurt the credit score of the borrower.