Personal Lines of Credit: The Basics

Personal loans are nothing new and you probably heard of them many times before but what is a personal line of credit? Are you familiar with the differences between the two? If you’re in need of extra cash, which one should you choose?   

Let’s first briefly define both so we can get into specifics.  

A personal loan is a set amount of money that is lent to you and must be repaid in full, with interest, over a fixed period of time.   

A personal line of credit, on the other hand, is an open-ended loan that can be borrowed up to a certain limit. You can use as much or as little of the credit line as you need and only pay interest on the amount that you borrow.  

This gives you great flexibility to borrow money when you need it, up to your available limit.

What Is a Personal Line of Credit (PLOC)?

As we already mentioned a personal line of credit is an unsecured loan that allows you to borrow money up to a certain limit. You can use this money for any purpose, and you only have to repay the amount you borrowed plus interest.  

A personal line of credit has interest rates that are usually lower than those on personal loans. They also offer more borrowing power when you need it. 

How Do Personal Lines of Credit Work?

Now that we had a brief introduction, let’s take a look at how does a personal line of credit work.  

They operate much like any other type of line of credit. You go through the application process and get approved for a set limit you can borrow. The “personal” part of their name stands for the fact that these loans can be used for whatever purpose you have in mind. Have some unpaid bills or medical expenses? Here is a great way to pay it all back.  

Once you take out the portion of the money, you will be charged with interest fee but just on the portion you took out and not on the whole amount. This will give you great flexibility because even if you miscalculated something and need more money than you originally thought, you can just take more from this line and not go through the whole application process again.  

Personal lines of credit also do not have fixed terms, so you can repay the loan over time as it suits you.   

If you are thinking about taking out this line of credit, be sure to shop around and compare offers from different lenders. Make sure you understand the terms and conditions before signing any paperwork as this will ensure you are getting the best personal line of credit for your needs. 

How to Get a Personal Line of Credit

If you’re looking to finance a large purchase or consolidate debt, you definitely should be considering a personal line of credit.   

To qualify for them, you’ll need good to excellent credit as there aren’t a lot of personal line of credit offers for individuals with bad credit out there. The better your score, the higher your credit limit and the lower your interest rate will be. Once you’re approved for this line of credit, you can use it for anything from funding a major purchase to consolidating some previous debt.  

Before you actually apply for anything, search different interest rate offers, fees, and repayment terms before choosing a lender. And remember, just because you’re approved for a personal line of credit doesn’t mean you have to use it, only borrow what you need when you need it.  

Personal Lines of Credit: Pros and Cons

These lines of credit offer several advantages and disadvantages compared to other loan types. 

On the plus side, you can borrow money as needed, have decent interest rates, and no fees for withdrawals.   

However, on the negative side, there can be high-interest rates if you don’t make your payments on time, and the risk of spending a lot more than you actually needed in the first place.   

Let’s take a more in-depth look at both of these sides.  

Pros  

• They are a great option if you need access to funds but don’t want the commitment of a personal loan.   

• Tend to have lower interest rates and more favorable terms.  

• You only pay interest on the portion you borrowed so you can save quite a bit of money if you are responsible. With a personal loan, you will usually have to start making payments on the full amount even if you don’t use all of it.  

• More flexibility in how you use the funds. You can take out as much or as little as you need, and there’s no set repayment schedule. This can be helpful if your expenses are sporadic or unpredictable.  

Cons  

There are a few potential drawbacks we must not forget to mention as well:   

• There is a possibility you will need to pay higher interest rates. This can be due to the fact that you have a really bad credit score so lenders are not seeing you as a reliable borrower or due to the fact that you failed to make any payment but keep drawing more funds.  

• They can also come with variable interest rates which can be hit or miss depending on your personal preferences. Having variable interest rates means your payments could go up or down depending on market conditions. This can make budgeting difficult and leave you vulnerable to rising costs.  

• Potential for overdrafts. If you’re not careful, it’s easy to overspend on your line of credit and end up with costly overdraft fees. Make sure you stay within your limit and keep track of your spending.  

Overall, personal lines of credit can be a helpful tool if used wisely, but there are some potential risks to consider before taking one out. Weigh the pros and cons carefully to decide if a personal line of credit is right for you.  

Personal Line of Credit vs. Personal Loan: What’s the Difference?

A personal line of credit is a type of revolving credit that allows you to borrow money up to a certain limit. You can withdraw money from your line of credit when you need it, and have the privilege of paying only the interest on the amount you borrow.   

A personal loan vs personal line of credit is a fixed-amount loan that you repay in equal installments over a set period of time.  

They both can be used for a variety of purposes, including consolidating debt, funding home improvements, or paying for unexpected expenses. But deciding which one suits you better depends on several factors, including your financial needs and goals.  

Here are some key differences you must be aware of:  

With a personal line of credit, you have the flexibility to borrow the amount you need at any given time, up to the limit you’ve been approved for. This can be helpful if you have ongoing or variable expenses.   

With a personal loan, you receive a fixed amount of funds in one lump sum and then repay that amount with fixed monthly payments over the time you agreed upon beforehand. And, if you need more money than you originally borrowed, you will need to apply for another loan.  

Another key difference between these two financing options is how they are structured. A line of credit is typically unsecured, meaning it’s not backed by collateral like a home or car. A personal loan may be either unsecured or secured, depending on the type you chose to take out.

Where to Get a Personal Loan of Credit

There are a few places you can get a personal loan or line of credit. Banks, credit unions, and online lenders all offer them. It goes without saying that each and every one of these lenders has its own set of requirements one must fulfill in order to be able to take out the money. The best place to get a loan will depend on your credit score and what you need the loan for.  

Let’s take a look at which banks offer a personal line of credit:  

• U.S Bank  
• TD Bank  
• Regions Bank  
• Key Bank  

All these banks offer quite a big variety when it comes to APR and the amounts you can potentially qualify for. Be sure to research them further to find the one for you.  

Additionally, if you have good credit, you may be able to get a lower interest rate from a bank or credit union. Online lenders tend to have higher interest rates, but they may be more flexible with terms and conditions.  

If you need the money for an emergency expense, online lenders may be the best option because they can fund loans quickly. In case you have time to shop around and compare rates, you may score a better deal from a bank or credit union.  

Different Types of Personal Lines of Credit

There are a few different types of personal lines of credit that you may be able to qualify for. The one you should go for will also depend on your specific needs, so read this next segment carefully.   

The most common is the home equity line of credit or HELOC. This type of loan is secured by your home’s equity, and can usually be obtained at a lower interest rate than an unsecured personal loan.  

Another type of personal line of credit is a student line of credit. This is designed specifically for students who are attending college or university. The interest rate on this type of loan is usually lower than on other types of loans, and the repayment terms are often more flexible.  

If you have good credit, you may also be able to qualify for a 0% APR introductory offer on a personal line of credit from your bank or credit card company. These offers typically last for 6 to 12 months and can give you some breathing room to pay off your debt without accruing any additional interest charges.  

Personal lines of credit are most commonly unsecured, but in some cases, they can be secured. Some banks offer this and it can be a good option if you have a poor credit score but have a certain asset you don’t mind putting down as collateral in order to secure better terms and higher limits.  

Bottom Line

To summarize all that we talked about, a personal line of credit can be a great way to get the money you need when you need it. Unlike a personal loan, a personal line of credit gives you the flexibility to borrow only what you need, when you need it. And you can use this personal line for anything from home improvements to covering unexpected expenses.  

When you apply for a personal line of credit, the lender will approve you for a maximum loan amount. This is the total amount you can borrow over the life of the loan. You can use as much or as little of your credit line as you want, and you only pay interest on the portion of the loan that you use.  

One of the biggest benefits of this line of credit is that it can help improve your credit score. When you make on-time payments and keep your balances low, it shows lenders that you’re a responsible borrower. This can help lead to better rates and terms on future loans.  

In case you’re unsure if a personal line of credit is the right choice for you, be sure to speak with a financial advisor to get a professional opinion and guidance. Don’t forget to compare offers from multiple lenders to find the best deal.