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A credit line, or a personal line of credit, is a pool of funds you can tap when the need arises. Just like having a credit card, you have a maximum credit limit on your credit line and you may be charged an annual fee.
A line of credit is different from a regular personal loan because the latter gives you the cash right after getting approval. With a credit line, you can get cash via an ATM or complimentary chequebook whenever you need it, although you can also start using it upon the moment of approval.
Another major benefit of a credit line is that it can be flexible, many of the personal line of credit offers from banks here in Singapore set a minimum payment (for example 3% of outstanding balance) so payments can be light.
Credit lines are similar to credit cards, in the sense that you can borrow up cash to a certain credit limit. You also only pay for what you borrow, and you do not have to reach the credit limit if you do not need to. Beyond this, however, credit lines are quite different.
The first major difference is that credit lines do not charge a withdrawal fee when you use it to get cash. Credit cards, on the other hand, charge a cash advance fee, usually S$15 or 6% of the withdrawn amount (whichever is higher).
Credit lines also have a lower interest rate of around from 9% p.a. to 19% p.a., depending on the financial institution. This is quite low compared to a cash advance's interest rates, which is often at 26% p.a. If you need regular access to quick cash, a credit line is the more cost-effective option.
Anyone can use a credit line, as long as you meet the minimum annual income requirement. For Singaporeans, this starts at S$20,000 per year.
A line of credit is quite useful to new business owners, entrepreneurs, or freelancers. This gives you some capital to get started, and help you meet expenses until your business takes off or your Notice of Assessments makes you qualify for another loan.
You can also use a credit line for large, unpredictable costs. Some examples of this include a medical treatment that will last over the course of several months, or university expenses for children studying abroad.
The limit on your credit line can go up to 4 times monthly income for the typical borrower. If your annual salary is high enough, you may qualify for a higher limit on your credit line. Unlike a personal loan, your credit line is not disbursed to you. Rather, you are free to draw down your credit line, up to its stipulated limit. This makes a credit line slightly more flexible to use, as you are free to withdraw from the account whenever you need.
A credit line is often bundled with a personal checkbook that you can use for your needs. You will also get an ATM card so you may make cash withdrawals on your own.
Yes, you will have to pay interest on a credit line. However, unlike a personal loan or other forms of installment loans, interest will only be charged on what you owe.
Credit lines generally have lower interest rates than credit cards, making them a potentially cheaper source of funds. However, if you miss any payments, your interest rates may be raised for a period. This increase could make your credit line interest rates on par or even higher than those charged on a credit card.
For this reason, you should always make sure you make any payments due in order to continue enjoying the best interest rates.