Line of credit: When to use it and when to avoid it

Line of credit: When to use it and when to avoid it

24 January 2024 | By INDIE

A line of credit is a flexible financing solution offered by banks and financial institutions that allows you to have instant access to funds. You can borrow funds whenever you want up to the approved limit and are charged interest only on the amount borrowed. You can make multiple drawdowns and once you pay back the borrowed amount, the entire credit becomes available again for use. Hence, a line of credit is a type of revolving loan.

Since there are no restrictions on when you can borrow and for what purpose and you do not need to go through any documentation or application process once your line of credit account has been set, it can be tempting to use a Line of Credit for all types of expenses and financial needs. However, to use such credit responsibly, you should first understand the benefits of a line of credit well and then carefully consider the times when you should make use of it and the times when you should avoid it.

Benefits of a line of credit

With IndusInd Bank’s new-age revolutionary mobile banking app INDIE, you can activate a line of credit of ₹5 lakh in a matter of minutes! Once you have set up your line of credit with INDIE, you can withdraw money whenever you like up to the approved limit. You do not need to go through any lengthy application or approval processes every time you need to borrow funds. There is no paperwork required, and neither is any collateral needed.

So, one of the primary benefits of a line of credit is instant access to funds. Another benefit is the cost-effective nature of this financing option. Unlike traditional loans like a personal loan where the interest is charged on the entire loan amount right from the beginning, in a line of credit, interest is charged only on the amount withdrawn. Other benefits of a line of credit include flexible repayments, tailored borrowing, revolving credit, and more.

When to use Line of Credit

Here is when it’s strategic to use Line of Credit:

When you don’t have an emergency fund in place

When you are faced with unexpected situations like a job loss, car or home repairs, medical emergency, etc., and do not have a sufficient emergency fund in place to take care of such time-sensitive situations, a line of credit can be a financial safety net. It can help deal with life’s uncertainties and reduce the mental and financial stress of such situations.

When you are facing short-term cashflow issues

If you are running a small business or are a freelancer, you may face short-term cashflow issues now and then owing to the irregular nature of your income. In such a case, a line of credit can be extremely useful to manage temporary expenses until your income from a specific project or venture comes in.

When you want to make risk-adjusted investments

While borrowing to build an investment portfolio is often not advisable, if you do it in a well-researched and strategic way, it can offer a certain upside. Hence, when you want to make risk-adjusted investments that have the potential to yield higher returns than the borrowing costs of a line of credit, this revolving loan option can be beneficial.

When to avoid a Line of Credit

When you want to indulge in non-essential spending

Using a line of credit for non-essential or discretionary spending can lead to unnecessary debt which can be detrimental to your long-term financial health. Hence, you should avoid using a line of credit for consumption purposes like shopping, travelling, etc., frequently.

When you want to make speculative investments

Avoid using a Line of Credit for making high-risk or speculative investments where the chances of capital loss are high. You should also only invest as per your risk appetite and not stray away from it just because you have access to more funds through a Line of Credit.

Line of credit: A financial boon when responsibly used

When used responsibly and strategically to take care of short-term financial needs and emergencies, a Line of Credit can be beneficial. Remember, Line of Credit also has an impact on your credit score so you should make timely repayments and not over-rely on credit.

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.