A personal line of credit is a type of financing 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.
- No collateral is required. In most cases, you may qualify for a personal line of credit without backing the loan with your home or vehicle.
- Fees vary between institutions. Some institutions charge a fee each time you access your credit line, and others charge an annual fee.
- Those with low or no credit may not qualify. Banks and 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 are more likely to be approved with a secured line of credit, such as a home equity line of credit (HELOC).
How personal line of credit interest rates work
Personal line of credit interest rates are variable, which means they are subject to change at any time. This can make it more difficult to predict your monthly payment and total financing cost. However, the bank or issuer must give you advance notice that your rate is changing.
With lines of credit, you only pay interest on the money you borrow, which makes them a good option if you won’t know the final cost of a financing venture. Interest accrues as soon as you withdraw funding and will be added to your monthly payment.
In contrast, fixed-rate personal loans come with a set interest rate and repayment schedule. You pay interest on the total lump sum borrowed, not just on the money you use.