Ultimate Guide to Line of Credit and How It Works
Reviewed by: Fibe Research Team
- Updated on: 23 May 2025
Reviewed by: Fibe Research Team
Quick access to funds is crucial during a financial crisis and you can get immediate support from financial institutions. But what if you’re unsure about the exact amount you need? This is where you can rely on a Line of Credit (LOC).
A LOC is not like a traditional loan. It gives you access to a pre-approved amount up to a specific limit and you can withdraw funds as and when needed. After repaying the withdrawn amount, you can borrow up to the limit again. Here’s all you need to know.
A line of credit means a flexible borrowing option where you get access to a certain amount of money and can use it whenever you need. You can repay the amount you use all at once or over time.
You have to pay interest only on the borrowed amount and not on the entire approved limit.
To approve you for a line of credit, the financial company will verify your credit score and overall financial history.
For example, say Anika, a small business owner, applies for a LOC to manage her business expenses. Here are details:
There are two types of lines of credit: secured and unsecured. They are different from each other in the following ways:
| Secured LOC | Unsecured LOC |
|---|---|
| Backed by collateral, such as property | Doesn’t require collateral |
| Lower rate of interest as per borrower’s eligibility | Often comes with a higher rate of interest as per the borrower’s eligibility |
| Higher credit limit as per borrower’s eligibility | Lower credit limit as per borrower’s eligibility |
LOC comes with multiple advantages such as:
A line of credit can be helpful, but poses certain risks:
There are different kinds of borrowing methods available. Here’s a comparison table to help you understand which one might suit you most:
| Aspect | LOC | Credit Card | Loan |
|---|---|---|---|
| Type | Revolving credit limit | Revolving credit limit | One time lump-sum amount |
| Interest Charges | On the borrowed amount | On the outstanding balance | On the total amount |
| Access to Funds | Withdraw as needed within the limit | Continuous access up to the credit limit | Full amount disbursed upfront |
| Flexibility | Highly flexible | Flexible for small and frequent purchases | Less flexible |
A line of credit has both advantages and disadvantages. On one hand, it can be an affordable way to cover unpredictable expenses. On the other hand, using a LOC without careful planning can cause financial strain. If you are looking for another option, consider the Fibe Instant Loan which offers flexible repayment options for up to 36 months. To get up to ₹5 lakhs in just 2 minutes, download the Fibe App.
A LOC comes with lots of benefits for those who want to handle unexpected expenses and are not sure how much they need. With LOC, you can withdraw your chosen amount from the limit multiple times and repay when you can. The best part about LOC is that you only have to pay interest on the borrowed amount instead of the full sanctioned amount.
Potential downsides include:
The policies for not utilising the funds from a line of credit depend on the institution. Sometimes, a non-usage fee may be charged. However, you are still liable to pay interest on the money you borrowed until it is repaid.
