- 6 min read
- A personal line of credit can offer flexible access to funding for a variety of needs.
- Credit scores and income can influence personal line-of-credit interest rates.
- Personal lines of credit can be an alternative to credit cards or home equity loans.
A personal line of credit can offer convenient access to cash when you need money for debt consolidation, home improvements, or emergency expenses. Unlike with personal loans, you only pay interest on the part of your personal line of credit that you use.
Personal lines of credit are an alternative to credit cards, which may come with high interest rates. You might consider a personal line of credit if you need flexible funding.
How does a personal line of credit work?
A personal line of credit is a revolving credit line. Personal lines of credit can be either “unsecured” (you do not need to offer the lender collateral) or “secured” (you do need to offer collateral).
When you're approved for a personal line of credit, you have a set credit limit that you can borrow from. For example, you might have a $25,000 credit limit.
How do you draw from a personal line of credit?
You can tap into that credit as needed, for virtually any purpose. Depending on the lender, you may have access to your personal line of credit via:
- Paper checks
- Debit card or ATM card
- Bank-account transfers
As you make withdrawals or purchases, your available credit shrinks. Once you reach your credit limit, you can no longer tap your personal line of credit until you pay off some of your debt. Meanwhile, when you make payments toward your outstanding balance, the amount that you can borrow from your personal line of credit subsequently increases.
What is the difference between a personal line of credit and a credit card?
Both personal lines of credit and credit cards are revolving credit lines. While a credit card can be used indefinitely as long as your account remains in good standing, a personal line of credit typically has an expiration date. Credit cards can also earn rewards for purchases, while a personal line of credit usually does not earn rewards. \
Below is an overview of how these two forms of borrowing compare.
|Personal Line of Credit||Credit Card|
|Borrowers have access to a revolving line of credit during the draw period, which eventually expires||Yes||Yes|
|Earn rewards for purchases or withdrawals made from their line of credit.||No||Yes|
|Charge a monthly or annual maintenance fee||Maybe||Maybe|
|Only pay interest on the credit you use.||Yes, unless you pay down balance||Can avoid interest if pay balance in full by statement date|
|May be unsecured, or secured by a savings account or certificate-of-deposit account.||Yes||Yes|
|On-time payments can help build credit||Yes||Yes|
One important difference between a personal line of credit and a credit card lies in how much you might be able to borrow. Depending on the lender, you may be able to get a personal line of credit for, say, $50,000 or even $100,000. Credit cards, by comparison, typically have lower credit limits.
How can you use a personal line of credit?
One advantage of a personal line of credit is that you can use it to meet different needs or financial goals. Some of the best uses for a personal line of credit include:
- Consolidating high-interest credit cards or other debts
- Paying medical expenses
- Covering emergency expenses
- Making home improvements or repairs
- Funding large expenses, such as a wedding
- Paying for smaller purchases, like new furniture or a vacation
- Covering basic living expenses if you're temporarily out of work
- Starting or growing a business
- As overdraft protection for a checking account
You might also use a personal loan or personal line of credit in place of an auto loan if you want to buy a car. Generally, there's not much you can't use a personal line of credit for.
Some lenders, however, do make an exception for higher education. For example, you might be able to use a personal line of credit to pay for a student's living expenses, but not college tuition. If you have to borrow, however, you're typically better off exploring federal student loans first; such loans offer low, fixed, interest rates and built-in borrower protections.
How to qualify for a personal line of credit
If you're interested in getting a personal line of credit, it's helpful to understand what lenders consider.
Generally, to qualify for a personal line of credit, you'll need a good credit score and steady income. The minimum credit score requirements for personal lines of credit vary from lender to lender. The higher your credit score, the easier it may be to get approved and qualify for the best rates.
It's important to shop around and compare different personal line-of-credit options. Again, you can find personal lines of credit offered at traditional banks, credit unions, and online lenders.
When comparing personal lines of credit, pay attention to:
- Minimum and maximum loan amounts
- Draw period and repayment terms
- Interest rates
- Monthly or annual fees
- Credit score and income requirements
You may also want to consider differences in funding speed if you need access to cash quickly. With online lenders, for instance, it's possible to get approved and get funded in as little as one to two business days.
Personal line-of-credit rates
A personal line of credit typically offers variable, rather than fixed, interest rates. (Fixed rates stay the same for the life of the loan; variable rates can move up or down, according to movements in a benchmark interest rate.)
For that reason, it's important to angle for the lowest rates possible on a personal line of credit, since that rate could increase later. Personal line-of-credit rates may start below 10% for the most creditworthy borrowers. But it's also possible to see rates of 30% or more.
Again, the rates that you pay for a personal line of credit will hinge largely on your credit score and income. Checking your credit before you apply for a personal line of credit can give you an idea of what kind of rates you're likely to qualify for.
How much can I get on a personal line of credit?
The amount you can borrow with a personal line of credit will depend on the lender and what you're approved for. Your credit limit may range anywhere from a few hundred dollars to several thousand dollars to $100,000.
When applying for a personal line of credit, it's important to consider how much money you'll actually need. Getting, say, a $100,000 credit line might sound good. Yet if you only need to borrow $25,000, the extra available credit might be a temptation to spend. That greater credit line could therefore cost you more in interest over the long run.
Pros and cons of a personal line of credit
A personal line of credit might seem more appealing than a credit card or home equity line of credit (HELOC). However, a personal line of credit is not necessarily right for everyone. Before you apply for one, it's helpful to weigh the potential advantages and disadvantages.
- Suitable for a variety of needs and goals
- Fast access to funding
- Use as overdraft protection on a checking account
- Rates may be lower than credit card rates
- Credit limits may be higher than a credit card
- Only pay interest on the credit you use
- No collateral is required for unsecured personal lines of credit
- Monthly or annual fees may apply
- Rates may be higher than a home equity loan or HELOC
- Interest is not tax-deductible
- Borrowers with poor credit may pay higher rates
- Variable rates can make a personal line of credit more expensive over time
Is a personal line of credit right for you?
Whether it makes sense to take out a personal line of credit can depend on your financial situation and what you plan to use the money for. Fast funding and the potential for low rates could make it an attractive option when you need cash. Reviewing your credit scores and budget can help you compare personal lines of credit against other borrowing options, to find the right one for you.
What is the difference between a personal line of credit and a home equity line of credit?
A personal line of credit is a revolving credit line that you can use for personal reasons. Personal lines of credit are often “unsecured” (no collateral is required). A home equity line of credit is a revolving credit line that's secured by your home. When you take out a home equity line of credit, you're borrowing against your home's equity value.
Why did Wells Fargo get rid of personal lines of credit?
Unsecured personal lines of credit can be risky for lenders, since there's no collateral involved. Should a borrower default, the lender would have to pursue other methods ( such as a creditor lawsuit) to get back the money that's owed. For this reason, many lenders have opted to do away with unsecured personal lines of credit.
Is a personal line of credit a secured loan?
A personal line of credit is a revolving line of credit, not a secured loan. (With a loan, you get a lump sum of money instead.) Personal lines of credit may be secured or unsecured, depending on the lender's requirements and your credit history. If you're required to offer collateral for a personal line of credit, you may be able to use a savings account or certificate-of-deposit (CD) account.