People looking for capital injections to boost their business or require a certain amount due to unexpected expenses have various options these days. While crowdfunding and peer-to-peer lending are popular these days, small and medium enterprises (SMEs) still lean towards the traditional source of funding, such as a personal loan or line of credit. Personal loans and line of credit have similarities and differences both. Reading further will help you when to choose one over the other, how to apply and the repayment process.
A borrower turns to loans when the funds are needed for one-time use generally and the amount needed is beyond they can arrange in a time frame. For example, an entrepreneur may require buying a new machine to increase production. The amount needed for the loan might be as low as few lakhs to as high as few crores. The size of the business or the situation of an individual decides the loan amount.
If an individual needs money for personal use but for recurring expenses, they go towards Line of credit. Some of the examples include paying employees, restocking inventory, etc. You can pull the money from the line of credit as and when required, hence providing the comfort of flexibility. The lender issuing Line of credit puts a cap on the money that can be borrowed each month.
Before a loan is granted, the lender and the borrower agree upon a repayment schedule. This decides the length of the loan, the rate of interest and equated monthly installment (EMI) that the borrower has to pay the lender. Contrary to the line of credit, a loan needs to be repaid immediately, whether the loan amount has been used or not.
For a line of credit, you make repayment of only the amount that has been used, and generally, you are given a few weeks or months to repay the borrowed amount. Every line of credit is different, however, mostly they ask for repayment of at least 1-2% of the amount that was borrowed. Just as the credit card bill, it is advisable to pay the whole amount or as much as possible each month to void increasing the debt. If the amount pulled from the sanctioned line of credit changes, there will not be fixed repayments.
Since you can borrow money from the same credit line in the next month as well. Hence they are sometimes called a revolving line of credit. The lender of the line of credit expects the borrower to be successful so that the outstanding amount can be paid properly once or twice a year. Lines of credit have a span of 1-2 years. After this the lender can renew or terminate the line of credit.
Both banks and other financial/credit unions offer a line of credit and loans. Before sanctioning a loan and to make sure you don’t turn out to be an NPA (non-performing asset); the financial institutions will check your personal and business credit history, your credit score, and report. They will monitor your past borrowing pattern. If the credit score is above 750, you will be offered the best rate of interest. A lower credit score might disqualify you.
Lenders may ask you to put up collateral while applying for a line of credit like home, fixed deposits, office spaces, etc.
Personal loans and credit line can both provide the finance you need for personal expenses or your business. However, they cannot be interchanged. If you need money for one time use, consider the personal loan. As you get time to repay over a comparatively extended time period. However, if the money is required for recurring expenses that you know that you can pay back on an ongoing and regular basis; consider the line of credit. The rate of interest also plays an important role while choosing a personal loan or a credit line.
The major point to remember here is if you put up collateral for a loan; be cautious because if you default the loan, you can lose the property.
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