There are numerous instances where the need for funds is recurring in nature. This is common when a business owner is dealing with expenses such as raw material purchase. Similarly, if you or your loved one has a long-term illness that requires predetermined therapy sessions, the funding requirements are spread out over time.
Many financial institutions have developed a loan product known as a line based personal loan to assist you in such situations. If you have never heard of this loan before, we have got you covered.
What is a line based personal loan?
A line based personal loan or personal line of credit is an unsecured revolving loan that functions similar to a credit card. The loan amount is determined by the lender based on your credit history and repayment capacity. Once the loan has been approved and disbursed, you can withdraw the funds up to the prescribed limit whenever you want.
The tenure till which you have access to funds in a line-based loan is predetermined. Moreover, under this loan, you are only required to pay interest on the amount used, not the amount sanctioned.
How does a line based personal loan work?
As previously stated, the lender determines the loan amount based on your credit profile. Once the loan has been disbursed, you can withdraw the entire amount or only a portion of the available limit. The lender allows you to withdraw funds numerous times until the total withdrawal amount reaches its maximum limit.
After you withdraw the funds, you must start paying the loan EMI from the next month. Furthermore, each time you pay the EMI, your credit limit is restored to the extent that you have repaid the principal amount.
Let's take an example to understand this better.
Assume Mr Srikant, a Chennai-based businessman, applies for a personal line of credit. After reviewing his profile, the lender deposits Rs 3 lakh into his account. Srikant uses Rs 50,000 from his credit line and repays Rs 25,000 of the principal outstanding over the next three months, as per his repayment schedule. In this case, after repaying the EMI for three months, Srikant's available credit limit will become Rs 2,75,000. Benefits of Line Based Personal Loan
A line based personal loan comes with numerous advantages. Some of these are described as follows:
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Freedom
You can use this revolving credit to meet any of your business and personal needs. For example, you can use the funds to purchase raw materials for your business, pay for medical expenses, or cover leisure expenses such as travelling.
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Flexibility
You are under no obligation to withdraw the entire sanctioned limit at once. It means that whenever you feel the need for funds, you can withdraw the necessary amount and are only responsible for paying interest on the amount withdrawn.
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Accessibility
The process for application and disbursal of line-based credit is completely digitalised. Once you are approved for the personal line of credit, you have quick access to funds with just a few clicks on your device screen.
Disadvantages of Line Based Personal Loan
Before applying for a line based personal loan, you must weigh the cons associated with it. A few major ones are described below.
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Impacts credit score
Personal credit lines hurt your credit score if you do not keep track of how much funds you have used. According to the credit bureaus, your creditworthiness will suffer if you use more than 30% of your revolving loan limit.
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Difficulty in EMI calculation
It is generally recommended that you use a loan EMI calculator to determine your affordability. However, calculating your monthly obligations beforehand with a personal line of credit is difficult. As a result, budget mismanagement is more likely with this type of loan.
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Shorter Tenure
A personal line of credit has a shorter repayment period than other loan types.
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Overspending
Having easy access to money may tempt you to overspend on things like outings, shopping, dining, and other leisure expenses. If you do not keep track of these expenses, your debt will build up over time, making repayment difficult.
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Higher interest rate
Many people believe that because this loan requires you to pay interest on the amount withdrawn, it is cost-effective. But the fact is the lender charges a monthly interest rate on the availed amount. When you compare the interest payable on a line-based loan to that for other types of unsecured financing, you will discover that it is more expensive.
Also Read: Can A Personal Loan Help You Improve Your Credit Score? Difference between a Credit Card and a Line Based Personal Loan
Given that personal lines of credit function similarly to credit cards, and are both examples of revolving credit, distinguishing between the two products is critical to avoid confusion.
| Parameters | Personal Line of Credit | Credit Card |
| Suitability | This loan is ideal for large-ticket purchases or recurring business expenses. | Credit cards are suitable for meeting daily expenses such as fuel costs, grocery payments, and so on. |
| Loan amount | The credit limit offered under this loan is higher than the credit cards. | Credit cards typically have a lower limit. |
| Interest rate | This loan type has lower interest rates than credit cards. | Credit card bills carry a monthly interest rate of 2%-4% if not paid on time. |
| Accessibility | A personal line of credit is slightly more difficult to obtain than a credit card. | A credit card has simpler eligibility criteria. |
Also Read: Personal Loan or Credit Card Which one would you go for Difference between Personal Loan and Personal Line of Credit
Since both loan products sound similar, it is natural for many people to become confused about them. Here is a table highlighting the distinctions between personal loans and lines of credit.
| Parameters | Personal Loan | Personal Line of Credit |
| Suitability | This loan is ideal for meeting any small or large expenses. People mostly apply for personal loans to cover wedding expenses, medical bills, home renovations, and debt consolidation. | You can use this loan to cover large recurring expenses such as raw material purchases, office utility bills, healthcare charges, etc. |
| Interest rate | You must pay the interest rate on the entire amount disbursed to your account. | Only the withdrawn amount is subject to interest payment. |
| Accessibility | You will need to reapply for this loan once you have paid off the entire amount. | When you begin making EMI payments, your credit limit is restored to the extent that the principal amount is repaid. |
Similarity between a Personal Loan and Personal Line of Credit
Personal loans and lines of credit have the following two things in common:
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Unsecured
Both loan products can be availed without providing any collateral.
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Qualifications
The basic requirements for both these loans are the same. You can get any of these loan products if you have never defaulted on a loan before and have a stable income.
Personal loan vs Line Based Personal Loan: Which is better?
Personal loans are better than a line of credit in many ways. You can use the entire amount of personal loan without worrying about your credit score dropping. On the other hand, your credit score will be negatively impacted in case your amount withdrawn exceeds 30% of the total line of credit limit. Furthermore, the interest rate charged under the personal loan is determined by your credit history. It means that if you have a steady income and employment, you can secure a low
personal loan rate of interest. However, if you choose to go with a personal line of credit, the lender will levy a monthly interest rate.
To conclude
A personal line of credit is an unsecured revolving loan that allows you to withdraw funds at regular intervals or all at once. However, the lender charges a monthly interest under this loan, which may put a strain on your budget. In this case, the best and most cost-effective alternative for your funding requirements is to apply for a
personal loan.
