Every bank offers many facilities to their customers through which they manage their finances. Line of Credit is also one such facility that is offered by the banks to their customers. Line of credit is a credit facility that is offered to customers and they can use it when they need funds. A Line of Credit can be in the form of loans, overdrafts, term loans, credit cards, and any other debt. On the other hand, LOC can also be secured and unsecured. If you are getting a credit facility without any collateral then it comes under unsecured LOC. But if you have kept collateral to enjoy the credit facility then it is a secured LOC.
Types of Line of Credits
There are two types of line of credit, one is secured and the other one is unsecured. So, you must explore both lines of credit offered by different banks and non-banking financial institutions.
If you are pledging an asset to borrow a loan or avail of a credit facility then it is known as a secured LOC. The bank has the right to sell the mortgaged asset and cover the losses if the borrower is unable to repay the credit borrowed by him.
A home loan and a car loan come under the Secured LOC because when you borrow a home loan the house is mortgaged. Similarly, if you take a car loan to buy a car then you will have to keep the car as collateral unless and until you repay the loan with interest to the bank. Therefore, in a secured line of credit, you will have to keep an asset as a security with the lender at the time of availing of the credit facility.
In order to avail of Unsecured LOC, you will not have to mortgage any asset with the bank. The banks decide the line of credit depending upon your income, Cibil Score, and repayment history. But the unsecured line of credit will have a high rate of interest in the comparison with secured LOC.
Business Loans and Personal Loans come under the unsecured LOC. If you are applying for a business loan then the bank will check the income of the business and the vintage period. If you comply with the bank’s business loan eligibility criteria then it will lend a business loan without collateral. On the other hand, if you are applying for a personal loan. Then the major things a bank looks at are the Credit Score and the income. You will not need any collateral security while applying for a personal loan.
Now you know the meaning of the Line of Credit. The types of LOCs offered by different banking and non-banking institutions. If we talk about a secured line of credit then a home loan and a car loan are the secured line of credit. On the other hand, personal loans and business loans are unsecured lines of credit. So, you know what LOC is in banking and under which LOC you fall when you apply for a loan.