Is the unused credit limit free?

The unused portion of a sanctioned LAMF credit limit generally does not attract normal interest because it has not been withdrawn.

It remains available borrowing capacity, subject to:

• Live collateral value
• Facility status
• Lender restrictions
• Renewal or expiry conditions

However, interest-free does not always mean cost-free.

Processing, renewal, pledge or other facility charges may still apply even when utilisation is zero.

Check the lender's Key Fact Statement and fee schedule.

Why the unused limit has no normal interest

Interest compensates the lender for money actually advanced.

Suppose you have:

Sanctioned limit: ₹5 lakh

but use only:

₹80,000

Normal daily interest generally follows the ₹80,000 utilised balance, not the entire ₹5 lakh sanctioned limit.

The remaining ₹4.2 lakh is simply unused borrowing capacity.

Charges can exist without utilisation

Some costs are linked to opening or maintaining the facility rather than the amount borrowed.

These may include:

• Processing fees
• Renewal or maintenance fees
• Pledge charges
• Documentation charges

For example, pledge charges can arise when your mutual fund units are marked as collateral even if you never withdraw money from the facility.

These are facility costs, not interest.

The available amount can shrink

An unused limit is not necessarily guaranteed forever.

Your available borrowing capacity may reduce because of:

• A fall in mutual fund NAV
• Facility expiry
• Withdrawal restrictions
• Changes in scheme eligibility
• Changes to the applicable LTV

So:

Available today ≠ Guaranteed future limit

Decide whether the standby line is worth it

Keeping an unused credit line may still make sense if you value quick access to emergency liquidity.

For example, a small setup or renewal fee may be acceptable if the facility gives you immediate access to funds when needed.

But if you are unlikely to use the facility, compare the cost of keeping it open with leaving your investments unpledged and applying only when required.

Check the whole facility, not one number

Review the complete facility periodically, including:

• Live LTV
• Available credit
• Collateral available for release
• Monthly interest
• Renewal date
• Transaction fees

Choose the simplest structure that gives you the liquidity you need while maintaining a meaningful collateral buffer.

Information on this page is general in nature. Eligibility, approved schemes, LTV, rates and charges depend on the regulated lender's current policy and the final loan documents. This is not financial advice. The content is purely for educational purposes.