A line of credit is a debt instrument wherein a lender extends a particular sum of money to a borrower- the borrower can withdraw funds from it as and when needed and pay interest on the amount used. Repayment of the principal starts after the tenure of this credit facility ends.
These flexible loans can be used for a number of purposes like renovating/remodeling a home or to fulfill business capital shortages among other things.
In case of regular loans, interest is to be paid on the entire loan amount sanctioned by the bank or Non-Banking Financial Company. For a line of credit facility, interest is charged only on the amount borrowed/used by the borrower and not on the entire credit limit assigned.
Borrowers who prepay any amount will not have to pay interest for the prepaid sum; moreover, they can also re-borrow from prepaid funds as they get added to the assigned credit limit.
Also Read: Line of Credit Quick Insight
There are no additional charges for this financial object whose features are similar to the overdraft facility offered by many lending institutions.
Line of credit facility is collateral-free - this means that there is no requirement of any mortgage to avail it. Applicants who have a good credit score and who satisfy the eligibility criteria of the lender can avail a line of credit after submitting the requisite documents.
Aman Khanna is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has an MBA in finance from Toronto University as well as years of experience delivering seminars on sound financial practices and debt management.