What Is a Personal Line of Credit? Pros and Cons

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Updated: 23rd Nov 2021
Written by Elijah Bishop
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November 23, 2021
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If you’re looking for a way to pay for emergency medical bills, fund home improvement projects, or supplement your cash flow temporarily, then taking out a personal line of credit could be the right move for you. A personal line of credit is similar to a temporary credit card account that allows you to borrow the amount you need from the account up to a specific limit. 

In this article, we will reveal what a personal line of credit is all about, how it works, and the pros and cons associated with taking out a personal line of credit. 

What Is a Personal Line of Credit? 

Sometimes referred to as PLOC, a personal line of credit is a revolving credit account that allows you to draw funds up to a specific limit. It’s similar to a personal credit card because it allows you to borrow funds as needed without having to take the total amount in a lump-sum payment. And just like a personal loan, a personal line of credit can either be secured or unsecured. 

How Does a Personal Line of Credit Work?

A personal line of credit is a type of revolving credit. This means that it allows you to borrow from the account multiple times rather than receiving the loan in a lump sum. So, if you qualify for a personal line of credit, the lender will approve you for a particular amount of money, usually between $1,000 to $100,000. 

Once approved, you’ll have access to the funds through a draw period, which allows you to withdraw from the account for a particular period. For example, if you’re approved for a $10,000 line of credit for two years, instead of receiving the $10,000 in a lump sum, the lender will grant you access to an account holding the $10,000 for two years. With such access, you can easily tap into the account whenever you need funds. 

One distinctive feature of a personal line of credit is that interest is only charged on the amount drawn and not on the total loan amount. So, if you withdrew $2,000 out of the $10,000, you’re only required to pay interest on the $2,000. And since a personal line of credit is typically unsecured, you do not need collateral to secure one. 

>> More: How to Get a Personal Loan

Personal Line of Credit Repayment Structures 

Before taking out a personal line of credit, you must be aware of the various repayment structures associated with it. And while most personal lines of credit function like credit cards, their repayment structures are usually different. Below are some of the common and less common forms of personal line of credit repayment structures: 

  • Balloon Payments: This type of repayment requires you to repay the entire balance at the end of the draw period. However, you may be able to refinance if you’re unable to repay the total amount. 
  • Demand Line of Credit: This type of repayment is rare, but some lenders may set up a PLOC as a demand line of credit. What this means is that the lender can request full repayment at any time. 
  • Draw and Repayment Periods: With this type of repayment, you can withdraw during the draw period and make monthly payments during the repayment period. 

How Can I Use a Personal Line of Credit? 

Below are some ways you can use a personal line of credit:

Managing ongoing expenses

A personal line of credit comes in handy when you need to manage significant expenses like an ongoing home improvement project or medical costs, where the total cost is unknown.

Supplementing Irregular Income

If your income stream ebbs and flows, a personal line of credit can help manage daily cash flow. It shouldn’t be used, however, to fund a lifestyle you can’t afford.

Obtaining Quick Cash

Sometimes long-term financing takes time. If you need to move quickly on investment or purchase, a personal credit line can be a ready source of cash while you work out long-term financing.

>> More: Best Short-Term Loans

What Are the Pros and Cons of a Personal Line of Credit? 

Before taking out a personal line of credit, you must weigh the pros and cons associated with getting one. While personal line of credits offer flexibility, they carry a higher interest rate than HELOCs and home equity loans. 

Pros:

  • Borrow only the money you need
  • Interest incurred only on funds borrowed
  • Flexible repayment options
  • Constant access to funds
  • Lower average APR than credit cards
  • Unsecured credit lines risk no collateral
  • Option to provide collateral for lower interest rates (secured loan)
  • Few restrictions on the use
  • Ideal for meeting temporary cash shortfalls

Cons:

  • Non-deductible interest expense
  • If interest rates increase, the variable rate on the line of credit also increases
  • Annual/monthly maintenance fees regardless of use
  • Higher rates than fixed-rate loans; not ideal for debt consolidation
  • The amount of interest charged may be more difficult to forecast
  • Fees/APRs vary widely by provider
  • Usually requires an account at a lending institution
  • Requires good credit score to qualify
  • Poor solution for long-term cash shortfalls
  • The temptation to overspend due to ease of access
  • Persistently high balance can decrease credit score

How Does a Personal Line of Credit Affect Your Credit Score? 

Generally, when you take out any loan, whether secured or unsecured, your credit score can be negatively affected if you fail to repay the loan. This also applies when you take out a personal line of credit. If you miss payments on a personal line of credit, your credit score can take several hits.

How to Get a Personal Line of Credit? 

The process of getting a personal line of credit is quite similar to applying for a personal loan or other personal loan alternatives. Depending on the lender, you may have to apply in person or via the lenders’ website. 

  • Review your credit score. Since a personal line of credit is usually unsecured, it is common for lenders to require a higher credit score. 
  • Shop around lenders. When looking to get a PLOC, you should shop around lenders and compare loan offers. Compare fees, interest rates and draw periods across lenders. 
  • Gather the necessary documentation. Like most personal loans, you will need to provide the lender with several documents regarding your income, employment, and assets. 
  • Fill out the application. Once you have decided on the personal line of credit of your choice, the next step is to send in an application and submit the necessary documents to back your application. 

Where Can You Get a Personal Line of Credit? 

Typically, banks, credit unions, and recently specialized personal loan lenders offer personal lines of credit.

While you may not get a personal line of credit with big banks like Chase and Bank of America, local banks and credit unions still offer some of the most affordable personal line of credit rates. Banks like PNC Bank, Citibank, Santander, among others, are the leading providers of personal lines of credit. However, we recommend Upstart or Upgrade if you are on the market for a quick loan. They offer low rates and minimum fees. 

>> More: Best Personal Loans

When Should You Use a Personal Line of Credit?

You should consider a personal line of credit for long-term projects with no fixed costs. Below are some situations where taking a personal line of credit would make sense:

  • Home renovations: If you’re renovating a home or adding onto a house, you might not know the exact cost of your repairs. Unexpected expenses might also pop up as you start the work. A PLOC lets you repeatedly draw on and pay off your credit line to cover additional costs.
  • Seasonal cash flow: If you’re a business owner who experiences a fall in cash flow at a specific time of the year, a personal line of credit could help tide you over until your income increases. Because you can use a line of credit multiple times, you can use it to pay for necessary expenses when your income falls during your off-season.
  • Medical expenses: Costs for medical procedures can fluctuate based on your recovery time and needs. A personal line of credit gives you the flexibility to take out money for extra costs that you might not have anticipated.

Which Type of Line of Credit is Best for Me? 

There are several types of line of credit (LOC). A personal line of credit is only but one type of line of credit. Each line of credit comes with its eligibility requirements, pros, and cons. Before taking out a type of personal loan, you should evaluate your situation across the types of line of credit to find out which is best for you. 

Personal Line of Credit

Personal lines of credit can be used to fund your expenses, whether to purchase something or cover unexpected expenses. Most personal line of credit lenders will determine how much you can borrow by checking your credit and other financial information like income and existing debt.

Home Equity Line of Credit (HELOC) 

You can use a home equity line of credit for home improvement projects or repairs. A HELOC is a second mortgage, and the amount you can borrow is determined by the equity in your home, your debt-to-income ratio, and your credit score.

Business Line of Credit 

A business line of credit can be used to cover things like inventory or unexpected expenses. The amount you receive depends on qualifications like revenue and how long your business has been active.

Is a Personal Line of Credit Safe to Use?

Yes, like any other line of credit, a personal line of credit is safe to use. A PLOC is an excellent option if you’re faced with a project without a fixed cost. More importantly, to avoid any impact on your credit score, you should endeavor to make the necessary repayments and at the right time. 

What Credit Score Is Needed to Qualify for a Personal Line of Credit? 

While there is no set-in-stone credit requirement, most personal line of credit lenders would want to see a higher credit score compared to a personal loan. In general, it is common for lenders to request a credit score of around 660 and higher. 

Bottom Line: What Is a Personal Line of Credit?

A personal line of credit can be used as a strategic tool to manage debt, grow a business or renovate a home. And by qualifying for a reasonable interest rate and terms, a personal line of credit could be a helpful resource for you in your financial needs. 

Elijah Bishop
Elijah Bishop
Elijah A. Bishop has been writing about real estate and mortgage for years. He has a degree in English, Media and Creative writing from the University of Georgia. He also holds a realtor license and has been in and out of the US mortgage industry as a Loan originator.