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What is a Credit Line?
A Credit Line is almost like a credit card. A bank or lender grants you access to a definitive amount of financing, which you may draw from whenever you would like or need. Although, you don’t make payments or incur any interest until you really tap into those funds. You pay for what you use. In other words, in this lending system, the borrower also has to pay a lower rate of interest compared to a standard loan. It’s sort of a credit card where you’ll pay the charges just for the amount that you have used and not for the whole credit limit.
Suppose the bank has sanctioned Rs.60,000 to you on the basis of your Line Of Credit (LOC) application and from the approved amount you’ve taken out Rs.20,000 as per your requirement. In such an instance, you’ve got to pay the interest amount for only Rs.20,000 and not for the entire amount.
What are the Different Types of Line of Credit (LOC)?
- Secured– In this type of LOC, the rate of interest charged by the bank is comparatively low. This is often because, during a secured line of credit, banks offer loans after accepting some of your valuable assets as security. Moreover, the income of the borrower will also be considered along with his or her credit score before finalizing the interest rate.
- Unsecured– The interest charged by the banks in this type of LOC is higher compared to the rate of interest of secured LOC. Being unsecured in nature, the banks don’t take any of the borrower’s asset as security. Hence, the probabilities of repayment are slightly on the lower side in this type of credit and consequently, the interest rate goes high.
How to Apply for a Line of Credit?
The procedure to apply for LOC is quite simple. You only need to step into your bank and apply for the same with all the documents required. The bank will check your credit score and your monthly income before approving the loan request. The final credit amount and the rate of interest are going to be based on your credit score, monthly income, and security.
Documents required for Credit Line:
- DRIVER’S LICENSE
- VOIDED BUSINESS CHECK
- PROFIT & LOSS STATEMENT
- BUSINESS TAX RETURNS
- PERSONAL TAX RETURNS
- BANK STATEMENT
- CREDIT SCORE
- BALANCE SHEET
Advantages of Credit Line:
- Pay interest on drawn funds only.
- Convenient for a good range of business ambition.
- Bad credit is also acceptable.
- Whenever needed, Capital is available.
- Attractive way to frame your credit score.