Pre-approved loans on your fingertips: Should you go for credit line when in need?

Jan 28, 2019

In October 2017, Umesh Rathi, 48 years, salaried person residing in Indore required Rs 5 lakh for home renovation. He applied for credit line loan from a fintech organisation using mobile handset instead of traditional method of applying for a personal loan at banks. A credit line is pre-approved credit provided to borrower wherein a person can withdraw a desired amount of credit periodically within a sanctioned limit as per requirements.

For instance, for home renovation lumpsum Rs 5 lakh was not immediately required by Rathi. So, he opted for a credit line facility wherein he opted to consume only Rs 3 lakh, to begin with. The interest that got kicked in first was just on Rs 3 lakh of Rs 5 lakh sanctioned by fintech lender.

He borrowed the remaining Rs 2 lakh in February 2018 from the same approved credit line. If he had taken a personal loan of Rs 5 lakh from a bank the option of borrowing in parts would not be available, and he would end up paying interest on the entire amount borrowed.

Satyam Kumar, Co-founder and CEO of an online platform offering loan products, LoanTap said, “If one is unsure of the total amount that is required for his/her personal need, then it is advisable to apply for credit line also known as personal overdraft loans.”

Such credit line facilities are particularly useful in children studying abroad, uncertain medical expenses in the family, for home renovation, wedding expenses, etc.

Some of the fintech companies offering credit line loans are MoneyTap, LoanTap, LazyPay, ZestMoney, etc. Several banks and non-banking finance companies (NBFCs) also provide line of credit to their customers, including Citibank, Bajaj FinServe, etc.

Using bank’s credit line loan facility one can borrow maximum upto Rs 25 lakh from Citibank whereas by fintech companies like MoneyTap it’s limited to Rs 5 lakh. The maximum limit in credit line loan varies for banks, NBFCs and fintech companies.

According to a study by BankBazaar titled Moneymood 2019, there’s an increase in the base of borrowers using easy access to loans via the internet and mobile apps. Taking a personal loan and credit line loan has become as easy as shopping through mobile apps on the go.

The average personal loan ticket size in non-metros is Rs 2.8 lakh compared to Rs 2.55 lakh in metros. Average personal loan size by a male is Rs 2.8 lakh and female Rs 2.73 lakh. According to the report, in 2019 more first-time salaried borrowers in metros and non-metros will go online/use mobile apps to fulfil their borrowing needs.

Steps to get a credit line loan using mobile apps

Assume you require Rs 3 lakh for a medical emergency in the family. You can apply for credit line loan using mobile apps offering this facility for instant access to money. For instance, you applying for credit line loan from MoneyTap app.

First, you need to download an app from Google Play Store and complete a registration process by filling basic details such as age, city, permanent account number (PAN), income to determine eligibility for a credit line. After sharing your details you will be intimated on the mobile app and email about your pre-approved line of credit amount, Fintech Company will schedule know your client (KYC) visit from registered banking partners in the city to verify and collect the KYC documents for final approval. Once you receive the final approval, your credit line is ready to use.

The entire process will be completed within 24 hours after registering on the mobile app and submitting requisite documents. Using this app, you can borrow as little as Rs 3,000, or up to your approved limit. The maximum amount you can borrow is Rs 5 lakh. The money is transferred instantly to your bank account linked with the app using immediate payment service (IMPS).

Personal loan vs credit line loan

In case of personal loans, the entire approved loan amount is disbursed in the customer’s bank account. The borrower pays fixed equated monthly installment (EMI) from the time of disbursement for the entire tenure of the loan. Thus, even if the disbursed loan amount remains unutilized in his bank account, then also he has to pay the interest on the same.

In case of credit line loans, the lending institution approves a loan amount for the customer based on eligibility. The customer withdraws only the amount that he requires at a particular time, from this approved amount. Credit line loan limit is set up for a lifetime for a borrower by MoneyTap. However, it can vary with other fintech companies.

Customer pays interest only on the amount withdrawn by him. This means if a borrower takes a credit line loan at 11 percent interest rate and withdraws one-fourth of the approved amount, interest will be only charged on the withdrawn amount.

The line of credit is automatically replenished upon the payment of the outstanding amount by the individual. The borrower can utilize his pre-approved credit limit multiple times as per requirements. Further, the pre-payment is flexible in credit line loan and customer has an option to service the minimal interest amount every month by the due date.

This credit line loans can be given by banks and NBFCs. Fintech companies can only source these loans from NBFCs after getting a final credit approval from them. However, there are fintech companies, who have in-house RBI registered NBFCs offering this facility instantly. Whereas, applying at banks take at least 2-3 days for approval of personal loans after submitting required documents.

Repayment of credit line loan can be done in EMIs of 2 to 36 months (varies for fintech companies). Whereas, in personal loan ranges from 1 to 5 years depending on the loan tenure by the bank.

Some of the fintech companies do not charge any pre-payment fees in credit line loans. “However, in addition, there may be a withdrawal fee or a one-time activation fee in credit line loan. These fees vary on basis of the customer’s credit profile,” said Gaurav Chopra, CEO and Founder of online financial services platform, IndiaLends.

Be cautious about charges with credit line loans

Fintech companies charges if you don’t repay by your due date. The penalty and charges may vary for fintech companies that you need to know while applying for credit line loans. For instance, terms and conditions of Fintech Company LazyPay are explained below:

– Late fee is Rs 10 per day up to 30 percent of your borrowed money

For instance, you have a due amount of Rs 1,000 and you fail to repay this by the due date. The company will add a charge of Rs 10 every day, you don’t repay. In this scenario, the fee is capped at Rs 300, which is 30 percent of the total due amount.

– EMI overdue charge

This charge is calculated if you are unable to repay your instalment for the withdrawal to the bank. It is calculated as 26 percent annual percentage rate per annum and charged on a daily basis. The charges are higher by fintech companies compare to EMI default on bank loans.

For instance, you have an instalment due of Rs 10,000 on March 3 and you aren’t able to repay this amount. The fintech company will add an overdue charge every day after March 5. The charges added each day will be Rs 7.12 if borrower don’t repay.

-Bank bounce charge is fixed at Rs 300 per billing cycle

This amount is charged when borrowers’ linked bank account with the loan has insufficient funds to cover the due amount.

What you should do?

Harshil Morjaria, Mumbai-based certified financial planner of ValueCurve Financial Solutions advised, “While applying for a loan with fintech companies, carefully go through the agreement for terms and conditions. Since, there is a clause that states the lender can demand repayment of the borrowed amount at any time.”

Such untimely repayment situations could bring an additional burden of debt on the borrower. Also, compare the rate of interest on loans offered by banks, NBFCs and fintech companies before applying.

High interest rates on personal loan and credit line loan are a huge negative. The range of interest rates is between 11 percent up to 24 percent, depending on the creditworthiness, the profile of the applicant, etc.

Determine your need before applying for a loan. Navin Chandani, Chief Business Development Officer, cautioned, “Do not borrow in excess from a credit line loan or personal loan since they are now easy to apply on tap of mobile phones. Remember that it is a loan that needs to be repaid with interest and is not free money.”

Credit line loans are a good option for borrowers to meet their financial needs by paying interest rates only on the borrowed amount from limit sanctioned. But it is a double edge sword. It must be utilised wisely to get the maximum benefit out of it.

Chandani advised, “If you are not disciplined regarding financial matters or in case you are not sure about your repayment abilities, it is better to avoid credit line loans.” Like credit cards, credit line loans can be a blessing when used wisely but can turn into a nightmare if used indiscriminately.

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