What is Line of Credit?
A line of credit (LOC) is a type of loan in which banks or other financial institution provides to the borrower. In a simple word, line LOC is money which banks agreed to lend to the borrower as per the terms and conditions. The borrower can use that money anytime as per his/her need until the maximum amount has reached. It must be noted that the borrower requires paying interest only on the borrowed amount which he/she has used.
A line of credit is a unique type of loan, just similar to a credit card. You will get certain money from the bank in advance, and you can use it as per your suitability. The bank will not charge the interest on the whole amount, but only on the amount you have utilized/used.
What is Loan?
Loan means a credit, in which one party gives the amount of money to another party for a fixed period of time. The borrow has to return the principal amount of the loan along with the agreed interest. In simple words, the loan is the amount that lenders give to the borrower for a certain period of time in agreement for repayment of the principal loan amount along with interest agreed between them.
In order to take a loan borrower, require to deposit collateral (security) in some cases, it can be unsecured as per the rules. The loan has various forms; some of them are commercial, personal loans, secured, unsecured.
Note: Line of Credit and the loan are the two different terms, the rules and the repayment methods of both are different. We have provided the deflation of both here. Moreover, for your better understanding, we are also providing the complete difference of Line of Credit vs. Loan in the tabular form. You can check the same from below.
Difference Between Line of Credit vs Loan
|–||Personal Loan||Personal Line of Credit|
|Interest Rate||The Interest rate is usually fixed.||Variable interest rate as per the usage of the amount|
|Collateral||It depends upon the type and the amount of the loan.||Generally unsecured|
|Good For||When you want a specific amount for a specific period of time, or, when you can consolidate higher-rate debts||When you don’t know how much money you require. As the interest will be imposed on the used amount, you can go for it.|
|Benefits||You can fulfill the eligibility quickly as there are no such major requirements.Generally, the loan has low-interest rates and with no extra fees. Easy and simple, you can repay the loan amount with interest in simple installments.||You can use the money when you need it, and you only have you pay the interest in on the amount you have used. Re Borrow facility is also available without reapplying.|
|Disadvantages||Borrower require to pay interest on the whole amount you have taken.You have to fulfill the eligibility terms and have to do a lot of paperwork for some type of loan.The bank or the other financial institution will not give you the loan without a good cibil score.There may be high broker charges.||You have to pay a higher interest rate in comparison to loans.The fee and other charges will be imposed.|
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CA Shivam Channa is a trusted financial writer with deep knowledge of financial systems. He has over 10 years of experience in writing His articles are always well researched and provide great insights into the topic at hand.