What Is a Personal Line of Credit?

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ByChristopher Boston
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Reviewed byAlvin Yam, CFP
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Updated: February 25, 2024

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A personal line of credit can be an ideal financial solution if you're financing a significant expense, like a home renovation. It offers the flexibility to draw funds as your project progresses, aligning well with the varying stages and expenses of home renovation. Instead of taking out a large sum upfront, as with a traditional loan, you can access the amount you need when you need it, paying interest only on what you use.

However, a personal line of credit isn't a one-size-fits-all solution for every financial need. MoneyGeek broke down how a line of credit works and weighed the benefits against the drawbacks to help you determine if this option aligns with your particular circumstances.

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How a Personal Line of Credit Works

When you qualify for a personal line of credit, the lender gives you a credit limit, which often ranges from $1,000 to $50,000. This limit depends on factors like your credit history and income. You can access funds up to this limit by transferring the money to your checking account, writing checks directly from the line of credit or using a card provided by your lender. This makes it convenient for managing unexpected expenses or ongoing projects.

During the draw period of a personal line of credit, which can span several years, you have the freedom to access your funds. Plus, you only have to pay interest on the amount you borrow.

Personal lines of credit have three main types of repayment methods:

  • Draw and Repayment Period: This option allows you to withdraw funds during a set "draw period," typically a few years. Note that the funds you spend can be available for borrowing again if you repay the principal in addition to interest, as long as the draw period hasn't ended. Once the draw period ends, you start paying back the principal (the amount you borrowed) and the accumulated interest.
  • Balloon Payment: With this method, you make smaller payments during the life of the line of credit. At the end, you pay a large “balloon” payment, covering the remaining balance.
  • Demand Line of Credit: While less common, this type gives the lender the right to call the loan due at any time. You must repay the full amount upon their request.

Understanding your lender's repayment terms lets you plan effectively, ensuring you responsibly manage your line of credit and avoid financial difficulties.

MONEYGEEK EXPERT TIP

Some lenders offer personal lines of credit with continuous draw periods, which are kept open after utilizing and repaying the balance, and your line of credit is still available without having to reapply. Review your lenders' policy terms on continuous draw periods and account maintenance to learn more. — Alvin Yam, CFP®

Personal Line of Credit Uses

Understanding where you can use a personal line of credit will help you maximize its benefits. We highlight some of the common uses for them below.

  • Home Renovations and Improvements: Due to its flexibility in fund access, a personal line of credit is ideal for home renovation projects where costs can be unpredictable. It allows homeowners to withdraw funds as needed for various stages of the project. This feature prevents borrowing more than necessary, as you would with a lump-sum loan.
  • Emergency Fund: A personal line of credit serves as an excellent emergency fund for unexpected expenses like medical bills or car repairs. The ability to draw what you need when you need it makes it a practical option for emergencies. Moreover, you only pay interest on the amount you use, making it a cost-effective emergency resource.
  • Travel and Large Purchases: For significant expenditures like travel or high-value purchases, a personal line of credit can provide the necessary funds without the high interest rates of credit cards. Its flexibility allows for borrowing exactly what is needed, plus the typically lower interest rates can make it more economical than other credit options.
  • Cash Flow Management: A personal line of credit can be an effective tool for managing cash flow, especially for those with irregular income patterns, such as freelancers or small business owners. It allows access to funds during lean periods to cover expenses or invest in opportunities, ensuring financial stability. The flexibility to draw from the line of credit as needed and only pay interest on the amount used makes it a practical solution for smoothing out cash flow fluctuations.
  • Moving Costs: Relocating can be expensive, involving hiring movers, transportation and temporary lodging. A personal line of credit provides the flexibility to cover these varying expenses as they occur. This adaptability helps manage the unpredictable costs of moving, allowing for a smoother financial transition to your new home.

A personal line of credit is a flexible financial tool, and knowing the various applications can help you make informed decisions about when and how to use it effectively.

Personal Line of Credit Fees

Different lenders have their own sets of fees associated with personal lines of credit. Be aware of these fees before you move forward, as they can significantly impact the total cost of your line of credit. These include:

  • Origination Fees: This is a one-time fee some lenders charge when you open a personal line of credit. It covers the cost of processing your line of credit application and is typically a percentage of your credit limit.
  • Application Fees: Some lenders charge an application fee to cover the costs of evaluating your creditworthiness. This fee is usually required when you apply and is not refunded even if your application is not approved.
  • Late Payment Fees: If you miss a payment or make a late payment, you will likely be charged a late payment fee. This fee encourages timely payments and can vary in amount.
  • Maintenance Fees: Some personal lines of credit come with a fee for maintaining the account. This fee is charged yearly or monthly, separate from the interest you pay on borrowed funds.
  • Transaction Fees: Whenever you withdraw funds from your personal line of credit, you might be charged a transaction fee. This fee is usually a small percentage of the amount withdrawn.

These fees can add up and affect the affordability and suitability of a personal line of credit for your financial needs. As such, always read the fine print and ask your lender to clarify any fees before agreeing to a line of credit.

MONEYGEEK EXPERT TIP

Personal lines of credit typically have interest rates tied to market rates like the prime rate or external benchmark. When this rate changes, the line of credit's APR adjusts. Consider using your line of credit less during high-rate environments to avoid paying more interest costs. — Alvin Yam, CFP®

Pros and Cons of Personal Lines of Credit

Before pursuing an application, weigh the benefits of a personal line of credit against its drawbacks. This balanced assessment can help you determine if this option aligns with your financial needs and goals.

Benefits of Personal Lines of Credit
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Drawbacks of Personal Lines of Credit
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Where to Get a Personal Line of Credit

You can typically obtain a personal line of credit from traditional banks, credit unions and select online lenders. Each of these lenders offers distinct advantages and conditions, so understanding the differences will help you choose the best option for your needs.

  • Traditional Banks: Traditional banks are a common source of personal lines of credit. They often offer the benefit of in-person customer service and the possibility of integrating your line of credit with other banking products. However, they might have stricter eligibility requirements and charge higher fees than other lenders.

  • Credit Unions: Credit unions are member-owned institutions known for their more personalized customer service. They generally offer lower interest rates and fees for personal lines of credit than traditional banks. However, to access these benefits, you need to become a member of the credit union, which often involves living, working or studying in a specific area or being associated with a particular group.

  • Online Lenders: While not all online lenders offer personal lines of credit, those that do provide a convenient and fast online application process, often with less stringent eligibility criteria than traditional banks. However, the lack of physical branches means you won't have in-person support, which is something to consider if you prefer face-to-face interactions for your banking needs.

MONEYGEEK EXPERT TIP

Some lenders may offer a prequalification process where they run a soft credit inquiry. A soft credit check instead of a hard check avoids lowering your credit score, allowing you to prequalify without penalty. — Alvin Yam, CFP®

How to Get a Personal Line of Credit

Applying for a personal line of credit can be as straightforward as getting a credit card. You typically have the option to apply online, over the phone or in person. Let’s dive into a step-by-step guide to help you through this process.

1

Evaluate Your Credit Score

Before applying, check your credit score, as it significantly influences your eligibility and the terms of the credit line. A credit score above 700 is typically needed to qualify. If your score is lower than desired, consider taking steps to improve it before applying.

2

Determine the Amount You Need

Assess how much money you need to borrow. This step ensures you don’t apply for more credit than necessary, which can lead to higher costs. Knowing the amount helps you select the right lender and credit offer for your financial situation.

3

Research and Compare Lenders

Look into different lenders, including traditional banks, credit unions and online lenders. Compare their interest rates, fees, terms and eligibility requirements. This research will help you find the most favorable and suitable line of credit for your needs.

4

Apply for a Personal Line of Credit

Once you've selected a lender, complete the application process. This typically involves providing personal and financial information and submitting documentation like income proof and identification. Ensure all information is accurate and complete to ensure timely processing.

5

Gain Access to Funds

After approval, the lender will provide you with details on how to access the funds. Depending on the lender, this could involve setting up an account, receiving a card or arranging transfers. Familiarize yourself with the process of withdrawing funds and any associated fees.

Is a Personal Line of Credit Right for You?

Deciding whether a personal line of credit suits you involves carefully evaluating your financial situation and needs. We highlight some steps to help clarify if this option is right for you.

  • Assess Your Financial Needs: Consider what you intend to use the credit for. A personal line of credit is ideal for ongoing, variable expenses or unexpected costs. If your financial needs are unpredictable or you face expenses you can't cover with savings, a line of credit might be a suitable option.
  • Examine Your Spending Habits: Reflect on your financial discipline and spending habits. A personal line of credit requires self-control as it's easy to access funds. As such, ensuring you won't be tempted to overspend is helpful. A line of credit can be a valuable financial tool if you have a history of disciplined spending and debt management.
  • Understand the Fees: Familiarize yourself with the potential fees associated with a personal line of credit, such as annual fees, origination fees or penalties for late payments. Compare these costs with other credit options. Understanding these fees assists you in assessing the overall cost-effectiveness of a personal line of credit for your financial situation.

By utilizing the above strategies, you can make an informed decision that aligns with your financial goals and circumstances.

Alternatives to a Personal Line of Credit

A personal line of credit may not be the ideal solution for everyone. We recommend exploring alternatives to find the best option that aligns with your needs and financial situation. These include:

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FAQ About Personal Lines of Credit

Understanding personal lines of credit can be tricky, especially for consumers who have never used them before. We answered frequently asked questions that may help clarify your concerns.

No, a credit card is different from a personal line of credit. While both allow you to access money based on a credit limit over time, a personal line of credit has a draw period, while you can continue to use credit cards as long as the account is open.

An excellent credit score is necessary to qualify for most personal lines of credit. That means you must have a score of 700 or higher.

A personal line of credit may be a good option if you need immediate access to money for unexpected expenses or ongoing projects like home renovations. However, if other more inexpensive forms of credit are available to you, then a personal line of credit may not be a good idea.

While a personal line of credit is a type of financing option, it is different from a traditional loan in the sense that the funds will not arrive in a lump sum. Instead, borrowers can access the funds anytime they need as long as they are within the draw period.

Personal lines of credit can be either secured or unsecured, and the choice between the two depends on your circumstances and the lender's offerings. An unsecured personal line of credit does not require any collateral, meaning the approval primarily depends on your creditworthiness.

On the other hand, a secured personal line of credit requires collateral. This could be a savings account, a certificate of deposit, stocks, a vehicle or real estate. The presence of collateral lowers the risk for lenders, which can lead to a larger credit limit and lower interest rates.

A personal line of credit application may involve a hard credit inquiry, which will be recorded in your credit report. Repayments can also affect your score, with on-time payments helping with your creditworthiness and missed payments damaging your score.

Lenders consider your creditworthiness, income and existing debt when deciding whether a borrower can pay off a mortgage. A line of credit is a debt obligation, which lenders will evaluate to see if your income can cover all your expenses.

If not managed carefully, a personal line of credit can lead to a cycle of debt. Frequent borrowing and minimum-only payments can result in prolonged debt and accumulating interest, diverting funds from long-term financial goals like retirement savings, investments or debt reduction. This can delay these goals or even put them out of reach.

Personal Line of Credit Glossary

MoneyGeek defines common terminology that often comes up when learning about personal lines of credit.

  • Creditworthiness: An evaluation of a borrower's likelihood to repay debts; significant in determining eligibility for a personal line of credit.
  • Credit Limit: The maximum amount of credit a lender will extend to a borrower on a line of credit.
  • Credit Report: A detailed report of a borrower's credit history, considered by lenders when assessing a line of credit application.
  • Draw Period: The period during which a borrower can withdraw funds from their line of credit. The borrower can repeatedly draw funds up to the credit limit during this period.
  • Default: Failure to meet the repayment terms of the line of credit, which can result in penalties and affect credit ratings.
  • Hard Credit Inquiry: A lender's check on a borrower's credit history as part of the line of credit approval process, which may affect the borrower's credit score.
  • Minimum Payment: The lowest amount of money you must pay on your line of credit statement each billing cycle to keep the account in good standing. Minimum payments usually only include accrued interest and not principal amounts.
  • Principal: The original sum of money borrowed on a line of credit, not including interest.
  • Repayment Period: During this phase, you pay the outstanding balance by repaying the principal amount you borrowed and any accrued interest. You can make no further withdrawals during this period.
  • Secured Line of Credit: A line of credit that is backed by collateral, reducing the risk for the lender and often resulting in a higher credit limit and lower interest rate for the borrower.
  • Unsecured Line of Credit: A line of credit that does not require any collateral (such as property or other assets) for approval.
  • Variable Interest Rate: An interest rate on a line of credit that can fluctuate over time based on underlying benchmarks or indices.

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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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.

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