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What Is A Personal Line Of Credit? Pros And Cons

Personal Finance

Personal lines of credit (PLOCs) are continuous, unsecured accounts with changing interest rates. A personal line of credit offers quick access to cash for both personal and professional needs. Up to a certain amount, it allows you access to money. A flexible loan from a bank or other finance company is known as a line of credit. A line of credit is a set amount of money that you can access as needed and repay quickly or over a particular length of time. It is similar to a credit card that offers you a set amount of money that you can use when, if, and how you like. The client may raise the credit limit at any time during the life of a personal line of credit facility depending on their credit profile and spending habits.

What Is The Eligibility?

To be eligible for a personal line of credit, one must have a credit score of at least 690 and a good credit history. More important is a proven track record of revenue and job documentation. Your options are limited because many financial organisations that offer personal lines of credit demand that you open a checking account with them and/or submit an application through a local branch. The following needs are crucial for a personal line of credit:

  • Payment background: A track record of on-time payments shows that you are a trustworthy borrower.
  • Credit score: Your credit score, which is decided by credit agencies, is a reflection of your financial standing and ability to repay bills.
  • Financial situation: Your ability to repay debts is shown by your net worth, cash on hand, and debt-to-income ratio, among other financial indicators.

How Can One Repay? Repayment Process

Because there are so many different repayment plans available, receivers should be aware of the particular conditions of their loans. Repayment methods are available, but they can come with difficult conditions. Below, we’ve listed a few uncommon repayment methods:

  • Draw and payback times: Personal lines of credit may occasionally have distinct pull and payback times. The user may get cash during this draw time. They must pay the money back throughout the repayment term in equal instalments.
  • Bubble pay-outs: A personal line of credit could have a requirement that the entire balance is paid at the end of the term. If balloon payments are employed and the debtor isn’t able to pay the money back the whole amount, refinancing may also be required.
  • Loaners terms: On occasion, banks will provide a collect credit facility, which works exactly like a regular credit source but gives the loaner the option to demand his money back.

Pros Of Personal Line Of Credit

Why is it used? Let us find out its benefits. The following are the good elements of personal lines of credit:

  • Quick financial access- One has the power to ask for money from a personal line of credit at any time. The loaner decides the access to the borrowing capacity online, through a mobile app, or at a bank branch.
  • Security- Few banks can give the liberty to use PLOC as a protection form on certain accounts. If you regularly give checks or are scared of emptying the finances, this could provide you with security.
  • Lower interest rates- A personal line of credit often offer lower rates of interest. This is very low compared to credit cards. Still, the interest rate seen in PLOC will fluctuate depending on the loaner and the credit history you’ve stated. 
  • Greater Options- You can withdraw any amount, up to the size of your credit limit.
  • Cost-Effectiveness- You just have to pay interest on the amount you borrow; it is not charged on the authorised credit limit.
  • Strong Credit Limit- Depending on your credit history and your needs, you may be accepted for a larger credit limit, allowing you the ability to manage your debt however you see fit.
  • The emergency helper-The best option for an emergency is to use a personal credit line, which is available around the clock. When dealing with a medical emergency or any other issue that necessitates financial commitment, this feature proves to be wonderful.
  • Collateral isn’t needed- A PLOC doesn’t need any collateral. Comparatively, the 1home line uses collateral of your house’s value as security. So, if you don’t have a property or vehicle, taking this personal line of credit will be beneficial to you. 

Cons Of Personal Line Of Credit

With every right, there are a few wrongs. Let’s see what are some major cons and negatives of PLOC. The cons are- 

  • Higher rates: A HELOC is much more secure as the home will be used as collateral to secure the debt. A PLOC, however, is not deemed secure because it doesn’t ask for collateral. This implies a higher interest range.
  • One cannot deduct the interest paid from the tariff because it is not tax deductible. This raises the price of starting your line of credit.
  • With bad credit history, it can be challenging to qualify because there is no collateral needed for a PLOC. The lender should trust you to give the money back. This means that if your credit history is bad, they won’t be able to provide you with a personal line of credit
  • Endless Cycle: Because the credit account is revolving, it is simple to keep getting cash out and lose track of repayments.
  • Costs of Closing and Upkeep: Some banks and finance companies may charge a fee to close a credit line, and others may charge a fee to maintain an open credit line.

Today’s Learning

Before using the credit line, make a repayment plan. Make sure you have enough money coming in each month to pay back the loan. The best approach to check your affordability is to use an EMI method to calculate your monthly bills. A personal line of credit can be issued for any amount you need and used regularly, working similarly to a credit card.

This method of taking loans has several benefits, including easy access to cash and more reasonable prices than credit cards. If you decide to get a personal line of credit, research platforms like Piramal Finance to get the best conditions and interest rates for your situation.