How Line of Credit Works Different from Personal Loan or Overdraft

New Delhi. Emergency situations can happen at any time in a person’s life. Sometimes there is a sudden need for money. If you have a bank FD and you are running short of money, then there is no need to break the FD. Instead, you can opt to take an overdraft or an OD against your FD. Overdraft facility can be availed against most of your investments like gold, mutual funds etc.

But what if you do not have any such investment which can meet the need of money at short notice. In such a case, you can opt for Personal Loans and Line of Credit or Line of Credit. In a personal loan, you have to keep paying the EMI, whereas in a line of credit, you only need to pay the interest and pay the principal later.

Credit line loan and overdraft facilities have many similarities
Gaurav Agarwal, Director and Head (Unsecured Loans), says, “There are many similarities between credit line loans and overdraft facilities. Both the options come with a pre-sanctioned credit limit, wherein the borrower can avail the loan multiple times during the sanctioned period. Both these facilities allow borrowers to make payments as per their repayment capacity without any prepayment charges.”

Repayment option attractive
OD and line of credit makes repayment options attractive. “As far as the interest cost is concerned, borrowers accrue interest on the amount borrowed (not the sanctioned amount) till it is repaid,” explains Agarwal. However, Agarwal said that in case of some credit lines, borrowers need to repay as EMI, which includes both principal and interest components.

Aggarwal says, “Overdraft facility is generally provided by banks to their current account holders like businessmen, corporates and SMEs. Recently, many fintech companies have started providing credit line facility to individuals as well. Fintech companies offer secured as well as unsecured lines of credit. Unsecured credit lines are usually given to salaried applicants on the basis of their credit score and monthly salary.”

Credit line facility through credit card also
Agarwal said that the interest rate in credit lines is generally lower than the interest rate paid in credit cards. One can also avail Line of Credit and get the amount in their credit card as well. Some banks/companies also provide credit line facility through credit cards. It can be used for cash withdrawal at ATMs, swiped at POS to do offline transactions or can be used for online transactions.”

Higher interest rates than personal loan
Evaluate the requirement and the time period for which you need the money before availing the credit line. You can get a personal loan at a low cost. Credit line facilities usually have higher interest rates than personal loans.

On choosing a personal loan, overdraft or line of credit, Agarwal says, “The high repayment flexibility offered through credit line facilities makes them more suitable for those facing frequent cash flow mismatches. However, such consumers can also consider overdraft facilities offered by banks through their savings, current or salary accounts, if they charge lesser interest as compared to credit line facilities. They can also consider personal loans extended to certain banks/companies as overdraft facilities.”

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