Using a Line of Credit in Emergency: Pros and Cons

Sometimes life can be just as volatile as the stock market. Pandemics like COVID-19 can break out, a recession can hit, a medical emergency can occur, or a job layoff can happen. At times like these, the one thing that helps act as a buffer is having an emergency fund that can take care of the financial burden of such situations and help reduce the overall stress. Hence, one of the basics of personal finance is building an emergency fund to fall back on during such unforeseen circumstances.

Calculating the emergency fund you need is easy – simply look at your fixed monthly expenses like rent, utilities, groceries, loan repayments, etc., and multiply by six. This way, you are saving up for six months’ worth of living expenses. You can decide to build an emergency fund for 3 months, 6 months, 9 months, or even 12 months. This entirely depends on your financial needs and preferences. While it is ideal to have a sufficient emergency fund in place, it is not always the case when an emergency hits. In such a situation, you can fall back on a line of credit.

What is a line of credit?

A line of credit is a helpful financing solution that you can use to manage emergency expenses when you don’t have sufficient savings in the form of an emergency fund available. When you have a line of credit (LOC) account in place, you can withdraw funds from it up to the approved limit as and when required.

For instance, you have an LOC account with a limit of ₹2.5 lakh. If in case your car breaks down and needs repairs worth ₹1 lakh, you can withdraw that amount to take care of it right away. The interest levied will be only on the ₹1 lakh withdrawn and not on the overall LOC limit. Say, two weeks after your car breaks down, you need to get some routine blood tests that cost ₹20,000 that aren’t covered by your medical insurance. In that case, you can go ahead and freely withdraw another ₹20,000.

Having an LOC account offers immediate access to funds whenever you need them in a way that is hassle-free and cost-effective. But what are the pros and cons of using a line of credit for emergency expenses?

Pros of using a line of credit for emergency expenses

· Instant access to funds: Once you have an LOC account setup, you can access funds instantly, without having to go through any application process like with other loan options. This is of utmost importance when tackling most emergency expenses, especially medical emergencies.

· Cost-effective: With a line of credit, you only need to pay interest on the amount borrowed at the time. With traditional loans like personal loans, the interest is accrued on the entire borrowed amount right from the beginning. Hence, utilising a line of credit for emergency expenses can be more cost-effective. There is also more flexibility when it comes to repayment.

· Preservation of savings: When you have access to an LOC account for emergency expenses, you don’t need to deplete your savings or liquidate your investments for long-term goals. This way you can stay on track with your financial planning and wealth creation activities.

Cons of using a line of credit for emergency expenses

· Interest cost: One of the primary cons of using a line of credit for emergency expenses is that it is not free of cost and is essentially a type of loan. Hence, you need to pay interest on the amount utilised.

· Risk of overborrowing: The easy access to funds can tempt one to overborrow and use the facility for non-emergency expenses like buying new gadgets or going on a holiday. While it’s okay to utilise your LOC account for such purposes too, you should make sure that you are spending according to your budget and not straying away from your financial goals.

· Impact on credit score: Being a type of loan, the line of credit impacts your credit score. Missed repayments, excessive borrowing, etc., can negatively impact your credit score and reduce your eligibility to borrow other kinds of loans in the future.

Set up an LOC account today

Used responsibly, a line of credit can be a boon in times of emergencies. It empowers you financially as you don’t need to rely on a family member or friend to lend you money during an emergency or go through lengthy loan processes to meet time-sensitive expenses.

You can set up an LOC account with a credit limit of ₹5 lakh within just a few minutes with INDIE, IndusInd Bank’s revolutionary app. It’s a seamless setup process – no paperwork or collateral is required. Once set up, access funds in multiple drawdowns as and when required. Download the app today!