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What is Personal Line of Credit? Is it Better Than a Personal Loan?

May 28, 2018

What is Personal Line of Credit? Is it Better Than a Personal Loan?

Personal loans are quite popular not just in India but also across the world. However, not many people know about the personal Line of Credit (LOC) service.

What is LOC?

A Line of Credit (LOC) is an agreement between a borrower and the lender as per which the latter promises to offer a certain amount of money to the former. However, unlike a personal loan in which the funds are disbursed all at once, LOC offers the money with flexibility. This is because the borrower is free to withdraw as much money as they need from time to time until the limit is reached.

For instance, if a financial institution has agreed to offer Rs. 2 lakh as a LOC, then a borrower can withdraw Rs. 50,000 in the first month and again in the next month, and then finally Rs. 1 lakh in the third month. This way, they have received the full amount of Rs. 2 lakh.

How is LOC different from a personal loan?

The following are the main differences between the two:

Disbursal Method

In a personal loan, the borrowed amount is disbursed in full in a single instance. However, in LOC, the same amount is put in a pipeline and it’s up to the borrower to withdraw the funds from the same over a certain period as per their requirements.

Loan Amounts

Many financial institutions don’t offer loans below a certain amount, say Rs. 50,000. However, there is no such problem with LOC as you can easily withdraw smaller portions.

Interest Rate

Even though LOC offers more flexibility, the interest rate offered is usually higher than a personal loan. In addition to that, the rate itself may increase during the term i.e. until repayment. However, in personal loans, the interest rate usually stays the same throughout the tenure.

LOC has its advantages. However, there are only select financial institutions that offer the service today. Some good options include Bajaj FinServe, Citi Bank, Money Tap, etc.
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