A line of credit is essentially an arrangement between a borrower and a lender, which can be a bank or a non-bank financial company. As per this agreement, the lender agrees to advance the borrower a maximum sum. The borrower may withdraw funds up to the maximum amount at any moment. The interest is levied on the principal amount borrowed, not just on the total amount borrowed. It is one of the primary benefits of having a line of credit. The borrowed funds can be used for any purpose and to meet any need.
But what is the difference between a business loan and a line of credit?
When we discuss the distinction between these two, we find that they are just marginally different. Both are purely credit products from which a borrower can get a certain amount of money, which is entirely dependent on the borrower's eligibility and reputation. In all cases, the borrower is obligated to return the loan in monthly or quarterly installments.
The difference is that with a loan, you borrow a lump sum of money at a time. The interest rate is set on the amount borrowed, and if you want additional funds, you must obtain another loan. However, a small business line of credit establishes a maximum limit on the amount of money you can borrow to meet your needs. Interest is levied on the principal amount borrowed.
Lines of Credit are typically offered in two types by traditional lenders such as banks and NBFCs. They are both secured and unsecured. Although the type of advance's name indicates its main characteristics, it is necessary to study more about it to understand the nature of the line of credit loan you are taking out.
There are two types of lines of credit:
Secured Line of Credit: This is a sort of advance in which you ensure the loan by pledging an asset as collateral. Perhaps the loan, backed by enough security, helps the online lender to charge more flexible and lower interest rates because the risk of failure is reduced. Thus, there is much more chance to recoup the remaining advance payment by liquidating the security.
Unsecured Line of Credit: As the term implies, there is no collateral involved as a form of security, making the advance riskier. The majority of LOCs are unsecured, meaning the borrower does not want to put up any collateral to secure the loan. Credit products with a maximum credit limit and a high interest rate are common. It is a good funding alternative for people who can not meet their short-term financial obligations.
Line of Credit Loan Advantages
- Flexibility: Once the lender approves the LOC amount, the borrower may withdraw any amount up to the allowed limit. Borrowers do not have this option with other loan types, such as business loan in india.
- Cost-Effectiveness: The borrower is only responsible for the amount borrowed, not for the whole credit line allowed by the lender.
- Appropriate for business owners: Often, new business entrepreneurs lack the financial resources necessary to pay a large loan all at once. Additionally, their financial requirements fluctuate with time. LOCs are the most advantageous loan kind for such persons.
- Large credit limit: In comparison to standard loan products, the borrower can benefit from an extraordinarily high credit limit, allowing them to handle their financial responsibilities with more ease.
- Best option: For self-employed individuals, an online line of credit is a better option than a personal loan because it provides a comparable solution but at a greater cost. As a result, it is more beneficial in terms of both flexibility and cost.
- Interest rates: The interest rate levied on a business line of credit loan has two characteristics. To begin, the rate is significantly lower than that of regular loans. Second, the loan outgo is reduced, as the loan is only serviced to the limit of the funds used rather than the total sanctioned amount.
We never sell or share your data with the marketing companies and 3rd party
