Many youngsters, when learning to be financially responsible, are often confused between terms like credit score, credit report, credit line and a credit limit etc. In this blog, we will learn about the frequently confused terms i.e. credit line and credit limit.
Read on to understand in detail the difference between a credit line and a credit limit.
What is a Credit Line?
A line of credit, also known as an ‘Evergreen loan’, is a type of loan which provides credit to individuals, businesses and other organisations that they can use to meet their personal and business demands. In this type of loan, individuals or businesses can borrow money up to a certain limit and repay the amount they owe and continue borrowing without having to apply for a new loan. Provided that the borrowed amount does not exceed the limit. The borrowers pay interest on the sum borrowed and are charged a fee each time they use a credit line.
You can apply for a credit line through banks or get an instant credit line online.
Credit lines are of two categories: secured and unsecured loans.
In a secured loan the credit issuers require you to reserve your asset as collateral, whereas an unsecured loan does not require any collateral.
In a secured loan, if your personal property is kept as collateral, the interest rates and fees will be lower since the lender can confiscate and take ownership of your assets if you fail to repay your loan.
A draw term is granted to the borrower, which is a period during which money can be borrowed. After the draw period, you are expected to pay the entire amount you owe immediately, or you may be allowed a payment window.
Types of Lines of Credit:
Following are the different types of credit lines and their uses.
Personal Line of Credit
A personal credit line is an unsecured and instant credit line. The lenders set your borrowing limit on the basis of your credit score, existing debt and your income which determines your creditworthiness. If you hold an excellent credit score, the chances of you getting approved with the lowest interest rates are quite high.
Business Line of Credit
A business LOC is a short-term financing facility for businesses looking for funds to purchase machinery, inventory or pay for operating costs. A business LOC provides a helping hand to businessmen by ensuring a consistent cash flow for their business. The lenders determine your borrowing limit and the interest rate on the basis of your business’s revenue.
Home Equity Line of Credit
A home equity credit line provides you funds for home renovations or any other purposes. HELOCs are collateral-based loans hence you can easily get approved for this loan even without having a good credit score. That’s why the interest rates of HELOCs are quite low and fixed throughout the tenure. The loan amount is determined on the basis of your home’s current market value and you are required to make monthly payments.
What is a Credit limit?
A credit limit is the maximum amount of credit a lender will grant to the borrower through credit cards, personal credit lines or home equity credit lines. The credit limit is determined by lenders on the basis of multiple factors like the borrower’s credit score, personal income and credit history.
When using a credit card or line of credit, try to spend below the credit limit set by the lender. Because if you exceed the limit, you will be liable to pay penalties and fines along with your regular payments.
How is a credit limit determined?
The credit limit is determined after a careful assessment of a person’s credit report. A credit report is a detailed account of the credit history of a person. It includes all the details of a person’s credit accounts, for e.g credit cards, any high balances and loans availed by the borrower. Having a high credit limit and multiple credit lines damages a borrower’s overall credit rating and are deemed a point of concern.