Understanding Personal Lines of Credit and Their Mechanism (2024)

Getting credit can give you a big financial bargaining chip in the short term. You can use it to make home improvements, buy big things, pay off high-interest debt or medical bills, and more. A personal line of credit also called a revolving loan, is a type of continuous loan that you can get from a bank or credit union. It is meant to be used only for significant expenses coming out of the blue.

But what exactly is a personal line of credit, and how does it function? Here's an article that should help you get the answers you're looking for.

What is a Personal Line of Credit?

With a personal line of credit (PLOC), you can borrow up to a certain amount of money over time. This time is called your "draw period." A personal line of credit is a sort of revolving credit analogous to a credit card; however, the credit limit associated with a unique string of credit is often higher than the limit associated with a credit card. If you have a source of income that is only sometimes reliable or get a bill you weren't expecting, this could be an excellent way to help you manage your daily cash flow. A revolving line of credit, such as those offered for personal use, lets you borrow and return against the amount of money allowed during the draw period.

PLOCs typically offer lower interest rates than credit cards, making it more cost-effective to use them for more considerable cash advances. But because PLOCs are unsecured, they work best for people with a good credit history. Because of this, there are better choices than a PLOC for some people. A personal line of credit could be helpful if you need to borrow money often but need to know how much you'll need. This could be useful for significant expenses like medical bills or home improvements.

How Does a Personal Line of Credit Work?

With a personal line of credit, you won't often need to put up valuables like a car or house as collateral since they are unsecured loans. There is a loan limit on how much you can borrow, interest rates that change, like credit card rates, and a schedule for paying back the loan. It will also tell you when you can take money out or borrow money and when you must pay back the money (make fixed monthly payments).

It is expected that if you currently have a savings account with a given lending institution, like a savings or checking account, you will be qualified for a personal line of credit or at least be offered better terms on such a product. If approved, your credit limit might be anywhere from $1,000 to $100,000, or even $250,000 or more if you have considerable financial assets with online lenders.

Your line of credit lets you borrow up to the amount you've been approved for. Once you've paid off your previous balance and any interest that has built up, you can borrow again. Lender-specific terms for how long you have access to your funds vary; some may be "open-ended," meaning there is no expiration date for your line of credit. Using a personal line of credit for commercial or investing reasons is typically prohibited.

Pros and Cons

Pros

• Adaptable funding options. With a personal line of credit, a borrower can use the total loan amount for as long as the loan's draw period lasts, which could be several years. This allows for a degree of leeway in both how and when the money is spent.
• Only accrue interest on actual expenses. The advantage of a personal line of credit is that the borrower only has to pay interest on the amount of money that is used rather than the entire personal loans amount.
• Recyclable cash flow. After repaying a personal line of credit loan following the lender's terms, the entire loan balance is made accessible for additional borrowing for the duration of the loan.
• Combine high-interest debts and pay them off in an intelligent way. Paying off higher-interest debt, such as a school or auto loan, with money from a personal line of credit is a fantastic idea because the funds can be used for many things around the house.

Cons

• Unpredictably high-interest rates. The interest rate on an unsecured loan of the same amount is likely lower than the rate on a personal line of credit, which can be changeable. But there are exceptions to this rule, such as reliable banks like First Republic Bank that offer competitive fixed rates.
• Additional costs. Lenders may assess additional fees, such as annual or monthly maintenance fees, for a personal line of credit. However, First Republic Bank will not charge you anything throughout the loan term.
• Possibly hard to come by. A high credit score is necessary to qualify for a personal line of credit because of the increased risk involved for the lender. You might expect more preferable terms if your financial situation is stable.

Types of Lines of Credit

A customer can choose from a wide variety of line-of-credit options (LOCs). One type is the personal line of credit. The benefits and drawbacks of using a particular LOC type vary depending on the specifics. The ideal type of LOC for you can be determined by weighing your needs against the benefits of the various available options.

• Personal lines of credit. An open-end kind of credit, such as a personal line of credit, is preferable to a closed-end credit transaction, which most traditional banks provide their customers as a form of credit. A PLOC may be your best alternative if you need access to a sizable sum of money fast for unsecured purposes, such as a vacation or home improvement. Since the lender is taking you at your word that you would repay the money you borrow with a PLOC, only those with stellar credit histories are likely to be approved for one.
• Business lines of credit. A business line of credit functions very similarly to a personal credit card in that it enables you to borrow up to a predetermined limit and then repay the money as and when required. Lines of credit extended to enterprises, however, sometimes feature more generous borrowing caps. You can put a line of credit for a business to various uses, such as purchasing necessary equipment or resolving short-term issues with cash flow.
• Home equity lines of credit (HELOCs). You can get a fixed lump sum of money from a HELOC based on the equity in your home and then use that money for anything you need. It functions similarly to a credit line in that there is both an interest-free draw term (often ten years) and a more extended repayment period (typically 15 to 20 years). A home equity line of credit, more often known as a HELOC, is a type of loan that lets you borrow up to 80–90% of the value of your property. Interest rates on a HELOC are variable, but they will typically be lower than on a personal line of credit. Nonetheless, your house serves as collateral for this secured loan. For the same reason, it's essential to pay more than the bare minimum on a HELOC throughout the draw period ends to prevent having to come up with a significant sum all at once when it comes time to pay it back.

Repayment Methods for a Personal Line of Credit

A personal credit line is a short-term loan. When you apply for one, you will be offered a draw period (during which you can withdraw). You must pay off your line of credit balance before the end of the draw term to move into the payback period.

You are responsible for paying off the outstanding sum during the specified repayment time. However, the terms of repayment could vary depending on the lender. It's possible to receive the following sorts of compensation:

• Demand line of credit. A PLOC may be established as a demand line of credit by some lenders. However, this is less popular. Lenders have the option of demanding immediate repayment at any time.
• Balloon payments. This repayment method's entire sum is due after the draw term.
• Draw and repayment periods. As mentioned above, this is the most typical method of paying back a PLOC. You'll need to make payments regularly, usually once a month, during the payback time.

Before you establish your line of credit, you need to consult with your lender regarding the repayment terms of the line. Check that you plan to pay back the money before accepting the cash.

How to Choose the Best Personal Line of Credit

If you want to receive a personal line of credit, the two most important things you will need to have been a decent credit score and a solid credit history. A unique line of credit (PLOC) may have higher interest rates than a home equity line of credit (HELOC), but the rates are typically still far lower than those of a cash advance on a credit card or a payday loan.

Check with several lenders to determine who will provide you with the finest terms. You will want to think about the interest rates, the terms of the repayment, and the length of the draw period. The procedure for applying for a PLOC is similar to applying for any other loan, and you can frequently finish it online. You will be required to supply information such as your name, Social Security number, employment information, and income details after you have selected a lender and determined the credit limit you are looking for.

Where to Get a Personal Line of Credit

Financial institutions like banks and credit unions most commonly offer a personal unsecured or secured line of credit. However, some online lenders do provide this service as well. Brief descriptions of the available choices follow.

• Banks. Both big national banks and smaller regional banks offer personal lines of credit. However, many lenders will require you to have an account already. You may also need to be close to an accessible bank branch.
• Credit Unions. Most personal credit lines require membership before you may apply. Credit unions are usually less likely to charge membership dues and application fees than for-profit businesses.
• Online Lenders. You can acquire the money you need the next working day if you apply for a personal loan online. Keep an eye out for lower credit limits when dealing with online lenders, even though their lending standards may be laxer than those of traditional financial institutions. Regarding personal lines of credit, some online loan companies only do business in certain states.

Best places to get a Personal Line of Сredit today 10.03.2024

US Bank

Apply For a Loan

US Bank is a reputable lender that offers Personal Lines of Credit to qualified borrowers. Credit score requirements may differ depending on the desired credit limit. They may offer flexible repayment terms and competitive interest rates.

Citibank

Apply For a Loan

Citibank provides Overdraft Lines of Credit with varying credit score requirements, depending on the credit limit requested. They offer competitive interest rates and may provide flexible repayment options.

PNC Bank

Apply For a Loan

PNC Bank is another reputable lender that offers Personal Lines of Credit to eligible customers. They may have specific credit score requirements and offer personalized interest rates and repayment terms.

TD Bank

Apply For a Loan

TD Bank is another option for those seeking a Personal Line of Credit. They may consider credit scores and credit history to determine interest rates and repayment options.

Editorial opinion

Important

Methodology

At Finanso, we've carried out a comprehensive analysis of over 100 lenders, assessing them based on 35 different parameters across six key categories: accessibility of loans, customer relations, quality of service, interest rates, and transparency of conditions.

In each category, we carefully considered the most critical factors in selecting a lender. These factors include the interest rates, available loan amounts, minimum credit score, minimum income, application fees, and the speed at which funds are transferred.
At Finanso, we highly value our users, which is why we also focus on the quality of customer service, user reviews, and additional features that can aid our users in making a well-informed decision.

Our ultimate goal is to provide insightful recommendations and expert advice to assist you in selecting a lender that best caters to your specific needs.

Additional resources

• Understanding the Power of a Line of Credit

• Comprehensive Guide to Personal Lines of Credit

• Line of Credit Landscape for Those with Bad Credit

• Understanding the Mechanism of a Revolving Line of Credit

• Understanding Unsecured Lines of Credit: A Detailed Review

• Understanding the Advantages and Potential Pitfalls of a Secured Line of Credit

• Your Comprehensive Online Line of Credit Resource

Sources

• Bankrate. What is a personal line of credit and how does it work? 21.10.2023

• Lendingtree. Personal Lines of Credit. 21.10.2023

• Creditkarma. What is a line of credit? 21.10.2023