Emergency money – What’s your best option from Line of Credit, personal loan, credit card?

While opting for Line of Credit, there is no obligation to use it. Borrowers can pay for it as and when they use it.

With the surge in Covid cases, and as we sink more into this pandemic, people are facing different kind of challenges and difficulties, one of the biggest being financial strains. The second wave of the pandemic and the subsequent lockdown has yet again impacted the financial wellbeing of businesses as well as the working-class population. Sudden expenses arise almost every alternate month which most have not planed or prepare for.

While limited finances are forcing people to opt for credit, it is also important to analyse the financing options available and plan accordingly. There are also various ways one could go about it, starting from Line of Credit (LOC), personal loan, money borrowed from credit card, etc.

Similar to a credit card loan, a line of credit (LOC) is a preset 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 on an as-needed basis. The interest will be charged only on the amount borrowed and as money is repaid, it can be borrowed again in the case of an open line of credit.”

How is the line of credit different from a personal loan or credit card loan?

LOC is more similar to a credit card than a personal loan. The difference is that credit lines usually come with more flexible options to convert the funds into a loan thus giving the borrower flexibility to repay them over a long tenure as compared to a credit card. Chopra says, “As compared to a Line of Credit, loans have a non-revolving credit limit, which means the borrower has access to the amount loaned only once. But in a Line of Credit, the borrower has continuous access to the funds and can access it as and when the need arises till the time it is active.”

Additionally, while opting for Line of Credit, there is no obligation to use it. Borrowers can pay for it as and when they use it.

Purpose of LOC in current times

Industry experts say the line of credit provides built-in flexibility on when and how much to borrow and how and when to repay. One of the big advantages here is that once the borrower repays the amount, he/she has the option to withdraw or borrow funds again, and as many times as needed. Since consumers only pay for the funds they actually use, experts say a line of credit can prove more affordable in the end.

Chopra adds, “Given the current situation, a line of credit would be the ideal choice as it gives you the flexibility to use the funds as and when the need arises (and pay only for what you use and when) without having to apply for multiple loans. A line of credit is an apt option to compensate a temporary cash shortage which might be the case for a lot of people presently.”

Pros and cons of LOC as compared to a personal loan

Pros

• Borrowers can access the funds as and when they need it, even multiple times within their limit without any additional charge.
• Line of credit offers flexible repayment options to the borrowers.
• Line of credit charges interest only for the amount utilized by the borrower and not for the entire line.
• Line of credits can be approved once and used over a long tenure.
• It also helps build your credit score.

Cons

• There might be some annual or monthly maintenance fees charged to the borrower.
• Applying for a Line of Credit requires a good credit score to qualify.
• The interest rates are variable and sometimes may 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 for opting for a Line of credit;

While opting for a Line of credit, the borrower needs to have a solid credit history to qualify for one.

• Credit score: Lenders often have higher credit score requirements for a Line of Credit as 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 for favourable terms.”
• Payment history: The borrower should have an established history of timely payments which demonstrates him to be a responsible borrower
• Financial condition: A decent debt-to-income ratio, cash on hand and net worth are some factors that determine the financial condition of the borrower, thereby reflecting their ability to pay back debts

Chopra adds, “As part of the application process for a Line of Credit, the lender may perform a hard enquiry on the borrower’s credit reports which may temporarily lower their credit score by a few points. Other than that, if the borrower makes late payments, that may have a negative impact on their credit score too.”