How are payments calculated on a line of credit?

The payments for a line of credit (LOC) work similar to a credit card. Once you withdraw a specific amount from the LOC, you are provided a deadline for payment. You have to repay the withdrawn amount + interest before the deadline to avoid any additional charges. In the meantime, if you require additional funds, you can withdraw it from the LOC, before the repayment of the first withdrawal.

Let’s explain payments on a line of credit with an example. Let’s suppose, you have taken an LOC of Rs. 5 lakhs. You withdraw Rs. 1 lakh from it. Then, you have to pay interest on the withdrawn 1 lakh and not the total available limit (Rs. 5 lakhs). Once you withdraw the 1 lakh, you are set a deadline for repayment which includes the principal amount + interest. If you require additional funds, you can withdraw instantly without having to worry about the repayment of the first withdrawal. For example, if you withdraw an additional Rs. 50,000, then the total interest will be charged on Rs. 1 lakh + Rs. 50,000. You have to repay the total withdrawn amount + interest within a specified timeframe.