The COVID-19 pandemic has amplified uncertainty over the finances and one’s physical and mental well-being. With increasing number of COVID-19 cases, it has become imperative for one to be prepared for uncertainty and plan finances accordingly.

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One such financial tool which helps in times of uncertainty is line of credit – wherein one can borrow up to the maximum limit, repay the funds and borrow again as needed.

The current situation has led to a large number of banks offering emergency credit lines to help their customers deal with the current financial hardships.

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"Some banks are offering these as an overdraft only to their select existing salary and pension account holders. Additionally, there are a few lenders who are offering line of credit to other borrowers also," says Gaurav Aggarwal- director and head of unsecured loans, Paisabazaar.

According to Gaurav Chopra, founder & CEO, IndiaLends and president of Digital Lenders Association of India, a line of credit offers the consumers flexibility on how much to borrow and how and when to repay.

“The biggest advantage with this is that once the amount is paid back, it can be borrowed again and this can continue indefinitely. With a line of credit, since consumers only pay for what they use, it can turn out to be cheaper as well,” he explains.

On the other hand, personal loans allow consumers to borrow a lump sum amount and repay it over a fixed repayment plan, usually on the basis of monthly installments. With a loan, borrowers have to pay interest on the full amount irrespective of when they use the funds.

In case of a financial crunch, Chopra of IndiaLends, says, a line of credit could be ideal where borrowers have access and the flexibility to use funds as and when the need arises without having to apply for multiple loans.

"In line of credit, interest is charged only on the amount one has borrowed, till it is repaid. This is best suited to those who face frequent short-term cash flow mismatches and also have the adequate capacity to repay the borrowed amount in a short period," according to Aggarwal.

Others should stick to regular personal loans offered in the form of term loan.

"Especially those who lack financial discipline and may tend to borrow unnecessarily more than they need, without having the capability to repay over a short period, should prefer taking a personal loan for their immediate needs," he adds.

First Published:May 14, 2020 8:42 PM IST