Personal Lines of Credit

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What is a personal line of credit?

A personal line of credit is a type of unsecured loan that allows you to withdraw funds, as needed, up to a predetermined limit. There are a few important factors you should keep in mind:

  • Interest rates are variable: This means your interest rates are subject to change, and you won’t have fixed monthly payments.
  • You’ll only pay interest on the money you use: As a revolving line of credit, you’ll borrow money on an as-needed basis up to a limit — and only pay interest on what you borrow.
  • No collateral is required: Even if you don’t own a home or car, you may qualify for a personal line of credit.
  • Fees vary between institutions: Some institutions charge a fee each time you access your credit line.
  • Those with low or no credit may not qualify: Lenders rely on your credit score and payment history when issuing personal lines of credit.
  • Secured financing may be an option: You may lock in a better interest rate and be more likely to be approved with a secured line of credit, such as a home equity line of credit (HELOC).

7 ways to use a personal line of credit

Home renovation or repair

Emergency funding

Ongoing medical costs

  Moving and relocation expenses

Wedding deposits

Business startup costs

Funeral expenses

How to get a personal line of credit

  1. Check your credit score: Since lenders rely on your creditworthiness, it’s good to know your credit score before you shop. You can use the My LendingTree tool to find yours, as well as analyze your financial health and identify opportunities to save money.
  2. Determine the amount you need: Get a general idea of how much money you’ll need access to on a rolling basis before applying.
  3. Research lenders that work for you: Some lenders specialize in low or no credit, while others may be better for small amounts of funding.
  4. Apply for a personal line of credit: The lender will want to analyze the details of your financial situation, such as your income and credit score.
  5. Receive the funds you need: With a personal line of credit, you can have the money you need fast – sometimes on the same day you apply.
glass piggy bank

Can you get a personal line of credit with bad credit?

No, probably not. Personal lines of credit are typically reserved for consumers with credit scores of 690 and higher. Since personal lines of credit aren’t secured by an asset like your car or a house, your credit is backed by your promise to repay the lender. Because of this, lenders rely heavily on your credit score. That also means that you could see higher interest rates than you would with a secured line of credit, such as a HELOC.

In some cases, it may not be a good idea to get a personal line of credit. You could consider alternative financing options, such as a credit card or personal loan — more on that below.

Alternatives to a personal line of credit

Personal loan

A personal loan is a type of unsecured financing that can be used to pay for virtually anything. Unlike personal lines of credit, personal loans have a fixed term and a fixed interest rate. You’re taking out a lump sum of money when you take out a personal loan, so you’ll pay interest on the full amount of the loan.

A personal line of credit may be a better option if you need access to funds on an as-needed basis, whereas a personal loan is a better option if you need a lump sum amount. Because of this, a personal line of credit may be a better option if you have a project and you don’t know the final cost.

Credit card

Credit cards and personal lines of credit are similar products, but an important distinction is how you use the funding. While credit cards can be used almost anywhere, personal lines of credit are a bit different. The issuer may give you a card or checks to withdraw funds, or you may have to transfer the funds to a checking account.

Another big difference between the two is how interest accrues. For a credit card, there’s a grace period in which you won’t be charged interest if you pay off the statement balance in full every month. But for a personal line of credit, there’s no grace period. That means that interest accrues from the day you make a withdrawal.

The lender for your personal line of credit may also charge a fee per withdrawal or have a minimum draw amount.

Since a personal line of credit may charge a fee per withdrawal, a credit card is best if you need credit to pay for everyday purchases, like groceries and gas. Plus, you may be able to reap rewards like cash back or travel miles when you utilize a credit card.

Personal lines of credit typically have lower APRs than credit cards. A personal line of credit is a good option if you have an ongoing project that needs funding, such as a kitchen renovation, as long as you don’t need to withdraw money on a consistent basis.

HELOC

A HELOC lets you borrow money against the value of your home on an as-needed basis. A HELOC works just like a personal line of credit, except that it’s secured. Since a HELOC is secured by an asset, borrowers typically see lower interest rates than they would with an unsecured personal line of credit.

A big drawback to opening a HELOC is the fees. You may have to pay closing costs in addition to fees for not using the line of credit or for closing your account. And most importantly, since you’re putting your home up as collateral, you risk losing it if you default on the payments.

Plus, some lenders require that you borrow a minimum amount, so this funding option may not be best for borrowers seeking a small loan. Like a personal line of credit, the interest rates are variable, meaning that your interest (and payments) may increase.

This financing option is only available to homeowners, so if you’re a renter, you’re out of luck. But the fees associated with a HELOC may be offset by a lower interest rate, depending on how you plan to use it. It’s a good alternative to a personal line of credit for homeowners.

FAQ: Personal line of credit

A personal line of credit is funding that you can borrow from a bank or lender on an as-needed basis. You can withdraw just a portion of your available credit, much like a credit card. And you can use the money to pay for virtually anything, like a personal loan.

You need to apply for a personal line of credit. It’s unsecured, meaning that lenders will rely more on your credit score to determine your worthiness as a borrower. You may also qualify for a personal line of credit if you go through a bank with which you have a good history.

While it’s not a good option for everyday purchases like groceries due to withdrawal fees, a personal line of credit could help you finance a home renovation or wedding planning.

There’s no magic cure-all for when you need financing. The best financing option will depend on your financial situation. That said, this financing option may not be available to those with low or no credit.

No, a personal line of credit is a revolving account that you can use like a credit card, in that you only withdraw the funding that you need. But credit cards and personal lines of credit have different eligibility requirements and methods for withdrawing funds.

Plus, credit cards have an interest grace period, whereas you’ll start accruing interest on a personal line of credit as soon as you withdraw funds.

That depends on your financial situation. If you need a specific amount of money, such as $10,000 to consolidate credit card debt, then you might consider a personal loan instead because it has fixed interest rates and monthly payments.

A personal line of credit may be a better option when you aren’t sure of the final cost of a project, like a home renovation.

Yes. If the lender or bank does a hard credit check, then your score will temporarily suffer. If you utilize too much of your available credit, your credit utilization percentage will go up, which can have a negative effect on your score. If you miss payments, your credit score may also take a hit.

Personal lines of credit are reserved for those with good and excellent credit. You’ll need a score of around 690 or better to qualify.

Personal lines of credit allow you to borrow and (pay interest on) only the money you need. You may see lower APRs than what’s offered by a credit card issuer. This financing option works well for long-term projects without a set final cost. Plus, with unsecured funding there’s no collateral, so you don’t risk losing an asset like your car or home.

Personal lines of credit are reserved for those with good credit scores, so they’re not a great solution for consumers with no or low credit. They’re also a bad idea for people who struggle with overspending, because of the quick access to funds.

Since this financing option has variable interest rates, it’s hard to nail down how much you’ll pay in interest. If you would prefer fixed payments and a clear timeline for repayment, then a personal line of credit is not the right financing tool for you.

Unlike personal loans, which have fixed monthly payments, personal lines of credit have variable payments. It all depends on how much you borrow and what the interest rate is.

You’ll repay your personal line of credit like a credit card: Payments typically begin as soon as you borrow, and you’ll have to make a minimum monthly payment. Payment schedules vary between institutions.