What Is a Personal Line of Credit?
A personal line of credit gives access to funds that you can borrow from over and over again, like a credit card. But unlike a credit card, personal lines of credit often carry relatively low interest rates.
How does a personal line of credit work?
Like a credit card, a personal line of credit (PLOC) is a form of revolving debt. In other words, you can continuously borrow until you hit your credit limit (as set by the lender). Paying down your balance frees up more credit from which you can draw, but only up to your credit limit.
A personal line of credit typically has a life cycle with two stages (which usually last three to five years each):
- Draw period: Your draw period is the length of time during which you can use your line of credit. Here, you’ll use a specific card or checkbook to borrow. You will also make minimum monthly payments.
- Repayment period: When you hit your repayment period, you will no longer be able to borrow. Instead, you will pay back your outstanding balance during this time.
The maximum credit limit on a PLOC generally ranges between $1,000 and $50,000. There may be a minimum draw amount. For instance, your lender may not allow withdrawals that are less than $50 at a time.
Although most personal lines of credit use the draw period/repayment period model, not all do. Your line of credit may only have a draw period, with your outstanding balance due in full once that draw period is over. This type of repayment could be rough on your budget. Be sure you know how your lender’s personal lines of credit work before jumping in.
| What’s the difference between open-end and closed-end credit? | |
|---|---|
| An open-end credit transaction is one that allows you to continuously borrow money up to a predetermined limit. You only have to repay what you borrow. | A closed-end credit transaction is one that provides a lump sum of money upfront. Then, you’ll repay that lump sum in installments over a certain period of time. |
| Personal lines of credit, credit cards and HELOCs are examples of open-end credit. | Personal loans, auto loans and mortgages are examples of closed-end credit. |
Personal line of credit interest rates
On a personal line of credit, you pay interest on what you borrow, and interest begins to accrue immediately. APRs on a personal line of credit are usually variable, meaning they can go up and down. Credit cards also have variable rates.
Your credit score, debt-to-income ratio and other aspects of your credit profile dictate the APR on your line of credit, as does the Wall Street Journal prime rate. This is the average interest rate that most lenders charge their most creditworthy customers at any given moment.
The Wall Street Journal prime rate (also called the U.S. Prime Rate) tends to fluctuate with interest rates set forth by the Federal Reserve, although it doesn’t have to. This is where the variability comes in.
For instance, you may see a lender that advertises a starting APR of prime + 5.00%. Also imagine that the prime rate is 8.50%. That means borrowers with the best credit could get a minimum APR of 13.50%, or 8.50% plus 5.00%.
Personal line of credit fees
Each lender sets its own fees on personal lines of credit. As you read the fine print, keep an eye out for extra charges such as:
- Origination fee: This is an upfront fee that some lenders may tack on to cover expenses such as credit underwriting and processing.
- Application fee: Some lenders may charge a fee to apply for a line of credit. If so, it’s best to move on to the next lender on your list.
- Late payment fee: Many lenders charge a fee for making late payments. Check to see if the lender has a grace period — some may levy fees only if you are 10 or more days behind.
- Annual or monthly fee: You may need to pay a maintenance fee every year (or month) that your line of credit is open.
- Transaction fee: Sometimes called a draw fee, some lenders may charge you to access your line of credit. Keep this in mind when deciding if a personal line of credit is your best option.
What are the types of lines of credit?
Lines of credit can come in several forms — consider below.
Unsecured line of credit
When a loan or line of credit is unsecured, that means it’s not backed by collateral. Unsecured lines of credit (and loans, for that matter) can be harder to qualify for if you have bad credit. If you do qualify with less-than-stellar credit, be prepared to pay higher interest rates.
Secured line of credit
Conversely, a secured line of credit is one that requires collateral. Collateral could be an investment account, a savings account or other financial vehicles, such as a certificate of deposit (CD). Or it may be a personal asset, such as your home. In any case, your lender can repossess (or take ownership of) your collateral if you don’t pay back what you borrowed.
Learn more about the difference between a secured and unsecured loan.
Business line of credit
A business line of credit is like a personal line of credit, but for business ventures rather than personal ones. These usually have higher credit limits since business owners tend to need larger amounts of money.
Pros and cons of a personal line of credit
Personal lines of credit are versatile. You can borrow as much or as little as you need, and you can continue to do so during your draw period. But this versatility could spell trouble if you have a hard time sticking to a budget.
Check out the pros and cons below to get a better understanding of whether a personal line of credit is right for you.
| Pros | Cons |
|---|---|
Flexible. You aren’t required to max out your credit limit, and you only pay interest on what you borrow. Competitive interest rates. Personal lines of credit tend to have lower APRs than credit cards. No collateral. You won’t have to risk personal property with most lines of credit. Future funding. A line of credit could be beneficial for long-term projects with no set end date. | Not everyone will qualify. In most cases, you must have good to excellent credit to get a PLOC. Unpredictable monthly payments. Your monthly payment fluctuates based on variable interest rates and how much you draw. Requires discipline. It can be tempting to borrow from your line of credit for unessential purchases. Fees. Your lender may charge a fee every time you borrow from your line of credit. |
What can you use a personal line of credit for?
You can use a personal line of credit for nearly anything. In particular, this type of funding can be a perfect way to tackle ongoing expenses. These could include home improvement or medical bills related to a chronic illness.
You can also use a personal line of credit for debt consolidation, but this depends on your credit score.
Lenders usually reserve lines of credit for the most creditworthy borrowers. Those who have a lot of credit card debt may have a lower score as a result. But if you’re juggling multiple credit card bills and have strong credit, you could save by consolidating. PLOCs usually have relatively low APRs.
Lastly, many banks offer a personal line of credit as overdraft protection. In this scenario, you could link a personal line of credit to your checking account. Then, any overdrafts will be charged to your line of credit, eliminating overdraft fees. You will, of course, have to pay the charge back, plus interest.
Where do you get a personal line of credit?
Although personal lines of credit may not be as common as personal loans, many banks and credit unions offer them. There’s a catch, though. Oftentimes, you must be a current customer to be eligible. Some lenders may even require you to be a customer for months before you can apply.
Eligibility requirements (and APRs) will vary across the lenders below. Still, this information should get you started.
| Lender | Loan amount |
|---|---|
| KeyBank | $250 - $5,000 |
| Fifth Third Bank | $5,000 to $100,000 |
| First Tech Credit Union | Up to $25,000 |
| PenFed Credit Union | $600 to $25,000 |
| PNC Bank | $1,000 to $25,000 ($5,000 in California) |
| Regions Bank | $500 to $50,000 |
| US Bank | Up to $25,000 |
How do you get a personal line of credit?
Getting a personal line of credit follows a similar process to getting other types of loans.
1. Check your credit score
First, you should see if it’s worth your time to pursue a line of credit by getting your free credit score. If your credit needs some work, you may want to seek out an alternative form of funding.
2. Evaluate your budget
Unlike a loan, a personal line of credit doesn’t have a set limit when it comes to how much you can borrow, at least not in the traditional sense. As long as you’re in your draw period, within your credit limit and making minimum monthly payments, you can borrow continuously.
Even so, it’s helpful to have a rough idea of how much money you’ll need on a rolling basis. If a lender gives you a limit larger than you need, you might find yourself taking on more debt than necessary.
3. Research lenders
You may want to check with your bank or credit union to see if it offers personal lines of credit. If it does, start there. However, that’s not where your search should end.
You can research other banks and credit unions that offer personal lines of credit and compare their features. Pay special attention to advertised minimum APRs, fees and customer service reviews. Normally, you would prequalify to compare offers, but prequalification isn’t usually possible on lines of credit.
4. Apply for your line of credit
Once you’ve narrowed down the personal line of credit that best aligns with your needs, it’s time to apply. If you’re borrowing from a new-to-you bank or credit union, your first step will be to join. Then, you can apply for your line of credit (unless the lender has a waiting period before it will allow you to do so).
5. Start borrowing
Once the lender approves you, it may send you a card or a checkbook so you can access your line of credit. Your first repayment is usually due about 30 days after you start drawing.
Can you get a personal line of credit with bad credit?
You might be able to get a personal line of credit with bad credit, but it’ll be tough. Lenders usually reserve lines of credit for borrowers with a FICO score of at least 680 (sometimes higher). If you don’t meet that criteria, you may want to explore other paths.
Credit lines typically aren’t backed by collateral, so lenders only have your creditworthiness to gauge your ability to hold up your end of the deal. Bad-credit borrowers may not be eligible, and those who are may face high interest rates.
Tip
If you are thinking about taking out a personal line of credit, check your credit score first with a service like LendingTree Spring. checking your credit before applying for a personal loan empowers you to make informed decisions, negotiate better terms, and avoid potential financial pitfalls.
Alternatives to a personal line of credit
Even if a personal line of credit doesn’t seem like a good fit, you may still have options.
Personal loan
A personal loan will give you a lump sum of money that you will pay back in monthly installments, plus interest. Like lines of credit, most personal loans are unsecured. Unlike lines of credit, personal loans come with fixed interest rates.
You can get a personal loan from a wide variety of lenders. Loans from brick-and-mortar banks tend to be best for good-credit borrowers due to stricter eligibility requirements. Alternatively, it’s usually easier to qualify for online loans, but they typically have higher APRs.
Personal line of credit vs. personal loan A personal loan may be best if you need a lump sum of cash rather than a stream of funds. If you have a one-time need for money and know how much that will be, a personal loan may be for you.
Credit card
A credit card and a personal line of credit are similar, but a few important distinctions set them apart.
Credit cards come with a built-in grace period. You won’t have to pay interest as long as you pay your balance in full every month. On a line of credit, interest begins accruing as soon as you make the charge.
Interest rates may be lower on a personal line of credit, but that doesn’t mean they are always less expensive. If your personal line of credit carries a transaction fee, you could be on the hook for a hefty sum (depending on how often you use it).
Personal line of credit vs. credit card Compared to credit cards, a personal line of credit may be better for large, infrequent purchases. Groceries and other everyday retail purchases make more sense for credit cards, especially if you earn cash back rewards.
HELOC
A home equity line of credit (HELOC) is like a personal line of credit, except it uses your home as collateral. Since a HELOC is secured, it usually carries a lower interest rate than unsecured personal lines of credit.
Still, HELOCs can be risky. If you don’t pay back your HELOC, the lender can foreclose on your house. HELOCs also usually come with closing costs that can range from 2% to 5% of your HELOC limit.
Personal line of credit vs. HELOC Due to generally lower interest rates, you might consider a HELOC over a personal line of credit. But that’s assuming you’re a homeowner and you are certain you can pay back what you borrow.