What is a Line of Credit? Meaning, Types, Interest Rates & How It Works (2026 Guide)

In the fast-moving monetary environment of 2026, traditional loans are not always suitable for us. Life can be very unpredictable. You might require ₹50,000 today for a medical emergency, another ₹20,000 next month for urgent house repairs, and maybe nothing at all for the next half a year.

Opting for a conventional instant online personal loan for a total amount feels somewhat strict—you pay interest on the whole sum from day one, even if you do not utilise the entire amount. But what if there were a more intelligent method? A financial backup that quietly occupies your account, charges you nothing when it is not in use, and provides you with immediate cash when you want it?

It is not a fantasy; it is a Line of Credit (LOC).

Although "personal loan" is a term well-known in India, many smart borrowers are now looking for "line of credit meaning" or "what is a line of credit" to locate more flexible options. A line of credit could be an extremely beneficial financial tool for you, whether you are a freelancer whose income is not stable, a business person requiring working capital, or a salaried worker setting up a fund for emergencies.

Are you looking for flexible borrowing options? Don't make a guess. Check your eligibility via My Mudra to contact the leading lenders in India who are providing smart credit solutions tailored to your profile.

Line of Credit Meaning

A line of credit is like a hybrid between a credit card and a personal loan.

What exactly is a line of credit? It is a "revolving" credit facility whereby a lender approves a borrower for a particular amount (for instance, ₹5 lakhs). This loan is not paid out instantly as in a personal loan; rather, it remains in a loan account that is designated for this purpose. The borrower has complete freedom to withdraw any portion of the amount or to take out the entire amount at any time within the limit specified.

The Great Rule: There is interest charged only on the amount that is withdrawn, not on the entire limit that has been sanctioned.

A Simple Line of Credit Example

Meet X, a graphic designer in Bangalore. Let's get acquainted with X, a Bangalore-based graphic designer.

Situation: ‘X’ is undertaking a home renovation. He has around ₹3 lakhs as total budget but he does not require all of it at once.

Conventional loan: When he applies for a personal loan of ₹3 lakhs, he has to pay interest on the entire amount of ₹3 lakhs from the very beginning.

Credit line: He is eligible for a ₹3 lakh unsecured line of credit.

• Month 1: He withdraws ₹50,000 for paint. He pays interest only on ₹50,000.
• Month 2: He withdraws ₹1 Lakh for furniture. Now he pays interest on ₹1.5 lakhs.
• Month 3: He gets a client payment and repays ₹50,000. His interest burden drops back down instantly.

This flexibility makes the line of credit Indian market one of the fastest-growing segments in 2026.

How a Line of Credit Works (Step-by-Step)

Understanding the mechanism helps you use it without falling into debt.

1. Approval & Limit: You apply for a line of credit online. Based on your credit score and income, the lender assigns you a Credit Limit (e.g., ₹5 lakhs).

2. Withdrawal (Draw Period): You can transfer money from this credit line to your savings account via the lender’s app. This is often called an instant line of credit online because the transfer happens in seconds.

3. Interest Calculation: Interest is calculated daily on the utilised amount. If you withdraw ₹10,000 for 10 days and then repay it, you only pay interest for those 10 days.

4. Repayment: You receive a monthly bill. You usually have two choices:

• Pay only the interest (keep the principal for later).
• Pay interest + part of the principal (to reduce future interest).

5. Revolving Nature: As soon as you repay the principal, your credit limit is restored. You can borrow that money again without a new application.

Types of Lines of Credit Available in India

Knowledge of the different types of LOC commonly utilised in India is important for people looking for this flexible option.

1. Personal Line of Credit (Unsecured)

This is the most popular type for salaried individuals. It is an unsecured line of credit, meaning you don’t need to pledge gold or property collateral.

• Features: Quick approval, requires a good CIBIL score (700+), limit depends on monthly salary.
• Use Case: Medical emergencies, wedding expenses, or bridging the gap between paychecks.

2. Secured Line of Credit

This acts as an overdraft facility against an asset you own.

• Against Fixed Deposit (FD): You can get a limit of up to 90% of your FD value. The interest rate is usually just 1-2% higher than your FD rate.
• Against Property: For business owners, a "Loan Against Property" can often be structured as a drop-line overdraft.
• Benefit: Much lower line of credit interest rates compared to unsecured options.

3. Business Line of Credit

A lifeline for SMEs and startups facing cash flow gaps.

• Use Case: A shopkeeper needs to buy inventory for Diwali but is waiting for payments from last month’s sales. He uses the credit line to buy stock and repays it once his customers pay him.
• Scenario: Managing seasonal sales spikes or delayed invoices.

4. Revolving vs. Non-Revolving LOC

• Revolving: Like a credit card. You pay, the limit refills, you borrow again. (Most common).
• Non-Revolving: Once you pay it back, the account closes. You cannot borrow again without a new application.

Line of Credit vs. Personal Loan: Which is Better?

This is the most common question we get at My Mudra. Here is a clear comparison table to help you decide.

Line of Credit Interest Rates (2026 Trends)

Interest rates for a line of credit vary based on whether it is secured or unsecured.

• Unsecured Personal Line of Credit: 12.5% - 19% p.a.
• Secured Line (Against FD/Gold): 8% - 11% p.a.
• Business Line of Credit: 11% - 16% p.a.

How to Estimate Costs (Line of Credit Loan Calculator) While standard EMI calculators don't work perfectly for LOCs (since usage varies), the formula is simple:

• Interest = (Amount Withdrawn x Interest Rate x Number of Days) / 365
• Example: You withdraw ₹50,000 at 15% p.a. for 20 days.
• Calculation: (50,000 * 0.15 * 20) / 365 = ₹410 approx.
• Compare this to a personal loan, where you'd pay interest on the full amount for the full month!

Want the best rate? Apply for a line of credit online via My Mudra to let our partners compete for your business. We connect you with top RBI-registered lenders to ensure you get fair terms.

Who Should Use a Line of Credit? (3 Scenarios)

1. The Freelancer: Priya is a graphic designer. Her clients pay her irregularly; sometimes after 45 days. She uses a personal line of credit to pay her rent and bills on the 1st of the month, and clears the debt as soon as her client pays. She pays minimal interest and never faces a cash crunch.

2. The Small Business Owner: Rohan runs a bakery. During Christmas, he needs extra raw materials but is short on cash. He uses his business line of credit to buy stock, sells his cakes at a profit, and repays the line immediately.

3. The Salaried Professional: Amit wants a safety net for medical emergencies. He keeps a line of credit active but unused. It costs him nothing, but if an emergency strikes at 2 AM, he can transfer funds instantly.

Benefits of a Line of Credit

• Pay-Per-Use: The biggest advantage. If you don't touch the money, you pay zero interest.
• 24/7 Access: Once approved, the money is available on your phone 24/7. No approvals needed for each withdrawal.
• Collateral-Free: Most personal lines of credit are unsecured, protecting your assets.
• Credit Score Boost: Using a small portion of your limit and repaying it timely significantly boosts your credit score.

Risks: When to Avoid a Line of Credit

While powerful, a LOC isn't for everyone.

• Overspending Risk: Easy access to cash can tempt you to spend on non-essentials (like gadgets or vacations) that you can't afford.
• Variable Interest: Unlike personal loans with fixed rates, some LOCs have variable rates that can increase if market conditions change.
• Discipline Gap: Since you often only have to pay the interest monthly, you might delay paying back the principal, keeping you in debt longer.

Line of Credit India: Current Landscape (2026 View)

In 2026, the line of credit Indian market has matured. Digital lending apps and major banks like IDFC First (FIRSTmoney), SBI, and various fintechs offer seamless LOC products.

• Digital-First: The entire process is now paperless. You can get an instant line of credit online without visiting a branch.
• UPI Integration: A lot of banks have already started letting customers pay through UPI by scanning, which is a very convenient option.
• Regulatory Safety: One of the RBI's most important rules is to be completely open with the borrowers. By not hiding any fees and charges, lenders give out a Key Fact Statement (KFS).

How to Apply for a Line of Credit Online

Are you prepared to have your financial safety net? Here is the simple process to apply for a line of credit online

Step 1: Check Eligibility

• Age: 21 - 60 years.
• Income: Minimum ₹15,000 - ₹20,000 per month (Salaried).
• Credit Score: 700+ is ideal for approval.

Step 2: Compare Lenders on My Mudra. Don't limit yourself to one bank. Visit My Mudra to view offers from multiple RBI-registered partners.

• Fill in your basic details (Name, PAN, Income).
• See which lenders offer you the highest limit at the lowest rate.

Step 3: Complete KYC. Upload your Aadhaar and PAN securely. Most partners offer Video KYC, so the approval is instant.

Step 4: Activate & Withdraw. Once approved, your limit is active. You can transfer funds to your bank account instantly via the lender’s app.

Get Started Now: Apply for a line of credit online via My Mudra. We help you connect with trusted, RBI-regulated banks and NBFCs to find the perfect credit line for your needs.

Final Summary

The line of credit provides the same advantages as a personal loan and credit card combined. You may use it for anything, from buying business stocks and financing a house upgrade to having a safety net for unexpected situations; a LOC never lets you pay interest on cash that you do not use.

Key Takeaways:

• Line of credit meaning: A revolving credit where one pays only for the interest on that particular amount.
• Best for: For regular costs, managing cash flow, and for unexpected situations.
• Interest Rates: Usually in the range of 13-19% for unsecured personal credit lines.
• Platform: Use My Mudra to compare the best line of credit offers safely and quickly.

Don't wait for an emergency to strike. Secure your financial backup plan today. Check your Line of Credit eligibility with My Mudra and take control of your cash flow!

Disclaimer: My Mudra acts as a loan aggregator and connects borrowers with RBI-registered Banks and NBFCs. My Mudra does not sanction loans directly.

Also Read:
- Top Microfinance Companies in India (2025 List)
- RBI Registered Loan App List (2025 – Safe & Verified Apps)