There are various options available to people who need immediate funds. One of these is a personal line of credit.

Generally, a personal line of credit is a financing option allowing borrowers instant access to a predetermined amount. You can withdraw funds as necessary, making it a good option to cover unexpected expenses. You can use the funds over time until you reach the set limit. Additionally, it comes with variable interest rates. You will only have to pay the interest rate of the money you used.

A personal line of credit may not be for everyone. Some individuals may not qualify since lenders and banks rely on credit scores, some individuals may not qualify. Typically, you would need an excellent credit score to get approved.

MoneyGeek breaks down what a personal line of credit is, how it works, its pros and cons, and how you can get one to help determine whether this financing option is right for you.

Key Takeaways

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Personal lines of credit allow the borrower to withdraw funds whenever necessary until they hit their limit.

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With a personal line of credit, borrowers only have to pay the interest rate for the money they used.

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It is necessary to have an excellent credit score (not just good or fair) to qualify for a personal line of credit.

How Does a Personal Line of Credit Work?

Taking out a loan helps individuals deal with various expenses. However, not all loans are the same.

For instance, a line of credit does not give the borrower a lump sum. Instead, the borrower is given access to an approved amount over a draw period. To put it simply, a personal line of credit is a type of revolving credit that allows the borrower to tap into the funds multiple times.

To understand how this financing option works, you need to know three major terms. These are the draw period, interest accrual and interest rate type.

Major Terms

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Draw Period

The draw period is the fixed timeframe when a borrower can take money from the loan fund.

Borrowers make monthly payments based on a minimum amount of interest depending on the lender. After repayment, the funds will be available again as long as the draw period has not yet ended.

In some cases, the borrower will have a continuous draw period. After this, their repayment period will start.

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Interest Accrual

A personal line of credit is an unsecured loan. Collateral is not needed to borrow funds. That said, it comes with interest.

This financing option comes with interest accrual. The loan incurs interest, which is calculated on a specific date. Typically, interest accrues daily and is added to the monthly payment. The accrued interest is based on the rate and the principal loan amount.

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Interest Rate Type

Usually, personal lines of credit come with variable interest rates. They are subject to change and are tied to the prime rate. The interest a borrower has to pay may fluctuate. Monthly payments are not fixed.

Because of this, it may be more challenging to predict monthly payments. That said, lenders inform borrowers in advance if there is a change in the interest rate.

Pros & Cons of Personal Lines of Credit

All types of credit have pros and cons. Before getting a personal line of credit, take some time to compare it with other financing options.

Weigh your situation and needs. Consider the advantages and disadvantages of each type of credit and see which one offers the most benefits to you.

Advantages of a Personal Line of Credit

Quick access to funds

A personal line of credit is a great option for individuals who need
quick money. Funds will be available when you need them. The funds are
easily accessible at any time during the draw period. Depending on the
lender, you can qualify through different channels like a bank branch,
online banking or a mobile application.

Flexible interest rates

Personal lines of credit can have lower rates than credit cards. That
is because they depend on the borrower’s credit history and the
lender. They may also be lower than the interest rates for traditional
fixed-rate personal loans.

In addition, interest rates are typically flexible. Since they follow
prime rates, rates can decrease. That said, an increase in the
interest rate is also possible.

No collateral requirement

As an unsecured loan, a personal line of credit does not require
collateral. That means you do not have to risk your assets and
properties. This also makes it ideal for those who do not have a home
or vehicle they can use as collateral for a loan.

Pay for what you borrow

One of the advantages of a personal line of credit is that you only
pay for the amount you withdraw, plus the interest. You do not have to
pay anything unless funds are withdrawn. That means you can keep the
money intact until you need it. However, be sure you take note of the
draw period.

Different offers may be available to borrowers. These can vary depending on the lender and loan amount. In most cases, borrowers maintaining a large balance enjoy additional perks.

For instance, lenders may offer discounts to borrowers who opt for automatic payments. Some banks also offer lower interest rates to borrowers who use the bank for wealth management. You can check with your lender to see if you qualify for this kind of offer.

Disadvantages of a Personal Line of Credit

No tax benefits

While personal lines of credit may have lower interest rates, they are
not tax-deductible. You cannot subtract the interest you pay on them
from your taxes.

Difficult to qualify

Since there is no collateral requirement, lenders typically have
strict qualifications for potential borrowers.

Your credit score will play an important role in determining whether
your loan application will get approved or not. Typically, you must
have an excellent credit history or a score of 700 or higher.
Otherwise, lenders will be less likely to grant you a personal line of

Lenders will also look at your income to determine the loan amount you
can afford. Individuals with unstable or low income may not qualify
for a personal line of credit.

Risk of overborrowing

It is important to remember that a personal line of credit is still a
loan. You must repay the loan at the end of your draw period, plus
interest. That means a repayment plan is necessary. Otherwise, paying
can be a bit challenging. You may also risk over-borrowing.

It’s wise to stick to a budget. Avoid splurging and only take out
money from your credit line when needed.

Variable interest rates

While borrowers are only charged for the funds they have withdrawn,
personal lines of credit accrue interest. Since interest rates are
variable, they tend to fluctuate over time. Unlike fixed interest
rates, your rates may change. Because of this, it can be a challenge
to know exactly how much you will end up paying.

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Creditworthiness is an important factor that lenders consider when deciding whether to approve a personal line of credit application. To qualify, you must have excellent credit. That is because this type of financing option is unsecured. Lenders must make sure the borrower can pay for the loan amount plus interest.

If you don’t qualify because of your credit score, you can consider other loan options like a secured credit card, or a secured or unsecured personal loan.

How to Get a Personal Line of Credit

Getting a personal line of credit is as easy as getting a credit card. Once you are sure that you are eligible for a loan, you can proceed with the application.

The process may vary depending on the lender. But, in general, applications can be completed online, over the phone or in-office.


Evaluate your credit score

Find out whether your credit score qualifies for a personal line of credit. Typically, you need a score of 700 or higher and a solid credit history to qualify.


Set the amount you need

Consider your needs. How do you plan to use the money? Get a general idea of how much money you would need access to over time. This will help you avoid over-borrowing.


Research and compare lenders

The application process, interest rates, draw periods and fees may vary per lender. So, it’s smart to consider different lenders before applying for a personal loan of credit. Compare terms and rates. Shopping around can help you find the best deal.


Apply for a personal line of credit

Make sure you check the requirements of the lender you have chosen. In most cases, financing institutions evaluate income and credit scores. So, prepare your income and employment-related information.


Gain access to funds

If your application is approved, you will have access to the funds. Modes of accessing the loan amount depend on the lender. For example, some lenders give borrowers a card to access funds. Some release checks.

Frequently Asked Questions About Personal Lines of Credit

Understanding personal lines of credit can be tricky, especially for those who have never used them before. MoneyGeek answers some frequently asked questions that may help clarify some of your concerns.

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.