Personal Lines of Credit

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What is a personal line of credit?

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.

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

Check your credit score. Personal line of credit eligibility is based on creditworthiness, so it’s good to know your credit score before you shop. You can download the LendingTree app to get your free credit score.
Determine the amount you need. Get a general idea of how much money you’ll need access to on a rolling basis before applying.
Research banks and lenders that work for you. Some specialize in low or no credit, while others may be better for small amounts of funding.
Apply for a personal line of credit. The financial institution will want to analyze your income and credit score, and you may need to provide identifying documents and income verification like pay stubs.
Receive the funds you need. With a personal line of credit, you have access to the money you need fast. You may be given checks or a card to access your line of credit.

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

It’s possible, but it may be difficult. Personal lines of credit are typically reserved for consumers with a good credit score, which is 670 or higher using the FICO scoring model. Since personal lines of credit aren’t secured by an asset like your car or a house, your credit is weighed as your ability to repay what you borrowed. This 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 lump-sum loan that’s repaid in fixed monthly installments over a set period of time and can be used to pay for virtually anything. Like a personal line of credit, this type of financing is typically unsecured and does not require collateral. Unlike personal lines of credit, personal loans have a fixed interest rate. You’re borrowing a set amount of money when you take out a personal loan, and you’ll pay interest on the full amount of the loan.

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Personal line of credit vs. personal 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. Consumers could opt for a personal line of credit if they have a project without a set final cost, which gives them the opportunity to borrow exactly how much money they need.

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, accessing funds with a personal line of credit may be more limited.

Credit cards offer 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, interest accrues from the day you make a withdrawal.

Since a personal line of credit may charge a fee per withdrawal, a credit card is best if you need 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 line of credit vs. credit card
When compared with credit cards, personal lines of credit typically have lower interest rates and higher credit limits. 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 home equity line of credit lets you borrow money against the equity you have in your home. A HELOC works just like a personal line of credit, except that it’s secured by your home. Interest rates are variable, meaning that your interest (and payments) may increase. 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 HELOC isn’t the best option for all borrowers. HELOCs typically come with closing costs, which can include a home appraisal fee, document preparation fee and title insurance, for instance. And since you’re putting your home up as collateral, you risk losing it if you default on the payments.

Personal line of credit vs. HELOC
A HELOC is a good alternative to a personal line of credit for homeowners, as long as you’re confident in your ability to make payments on time. The fees associated with a HELOC may be offset by a lower interest rate, depending on how you plan to use it.

FAQ: Personal line of credit

The best financing option will depend on your financial situation and unique needs. While a personal line of credit isn’t a good option for everyday purchases like groceries due to withdrawal fees, it could be an efficient way to finance a project when you don’t know the total cost.

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 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.

Banks or lenders may require a hard credit inquiry when you formally apply for a personal line of credit. This can cause a temporary drop in your credit score, but it’s not a derogatory mark. 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 will likely take a hit.

On the other hand, making on-time and in-full payments on your line of credit can help you build a healthy payment history, which can increase your credit score.

Personal lines of credit are reserved for those with good and excellent credit. You’ll need a score of around 670 or higher 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. And there’s no collateral, so you don’t risk losing an asset like your car or home.

Personal lines of credit may not be a good option for borrowers with bad credit or for consumers who struggle with overspending. 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 you may prefer a personal loan instead.

Personal lines of credit have variable payments that depend on how much you borrow and what the interest rate is. Payments typically begin as soon as you borrow, and you’ll have to make a minimum monthly payment, much like a credit card. Payment schedules vary between institutions.