Personal Lines of Credit

Get up to 5 personal loan offers in minutes

How Does LendingTree Get Paid?
Privacy Secured  |  Advertising Disclosures
 

How Does LendingTree Get Paid?

LendingTree is compensated by companies on this site and this compensation may impact how and where offers appears on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

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. This can typically range from $1,000 to $100,000, but keep in mind that personal lines of credit are temporary. Since you won’t need collateral, it’s a type of unsecured loan that consumers can sometimes only qualify for if they’re already a customer of the issuing financial institution.

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 predetermined 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, while others only 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 increase your likelihood to be approved with a secured line of credit, such as a home equity line of credit (HELOC).

How does a personal line of credit work?

While personal loans offer consumers a lump sum of money with fixed interest rates and monthly payments, personal lines of credit work more like a credit card.

When you’re offered a personal line of credit, you’re provided a limit to how much you can borrow; you may withdraw as much or as little as you need. Interest is only charged on the amount you take out, and rates are typically variable — this can make it more difficult to predict your monthly payment and total financing cost.

Because a personal line of credit is an open-end credit transaction, you can withdraw from your account multiple times during the draw period and only repay the funds you borrowed, plus interest.

Open-end vs. closed-end credit transaction: What’s the difference?

An open-end credit transaction is a type of credit where consumers can repeatedly borrow money from an account up to a preapproved limit, and only have to repay what’s been withdrawn. Types of credit that have open-end transitions include personal lines of credit, credit cards and HELOCs.
A closed-end credit transaction means borrowers will receive a lump sum of money after they’ve been approved by a lender. They’ll repay that lump sum as well as interest on a monthly basis. Forms of credit like personal loans and auto loans are closed-end loans.

Personal line of credit interest rates

Interest rates are variable on personal lines of credit, which means they’re 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 it a good option if you don’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.

Personal line of credit fees

Like most types of credit, when you open up a personal line of credit, you may be required to pay several types of fees. Here are a few types of fees you may be charged:

  • Origination fee
  • Application fees
  • Maintenance fees
  • Late payment fees
  • Cash advance fees

When shopping around for a personal line of credit, aside from interest rates, be sure to compare the fees lenders charge.

How can you use a personal line of credit?

Similar to personal loans, personal lines of credit can be used in a variety of ways. Personal lines of credit can be used to pay off credit cards, consolidate debt or cover medical bills. And while many personal loan lenders don’t allow their funds to go toward business or educational expenses, personal lines of credit can offer a bit more flexibility.

A personal line of credit may be especially useful if you’re anticipating a large expense — like a home improvement project — and would prefer a revolving debt to borrow from over a period of time rather than a lump sum.

Here are some of the most common ways consumers use personal lines of credit:

Home renovation or repair

Emergency funding

Ongoing medical costs

Moving and relocation expenses

Wedding deposits

Business startup costs

Funeral expenses

Pros and cons of a personal line of credit

ProsCons

  Can withdraw funds on an as-needed basis

  Flexible in how you can use your funds

  Consistent access to funds when you need them

  Required to pay interest on only the funds you take out

  May have to pay a fee each time you withdraw money

  May be charged application and maintenance fees

  Variable interest rates can make it challenging to budget

  Consistently withdrawing large amounts may impact your credit score

What are the types of lines of credit?

Unsecured line of credit

An unsecured line of credit doesn’t require any collateral and instead focuses entirely on your creditworthiness. This may make it challenging for consumers with poor credit to qualify or receive lower interest rates.

Secured line of credit

With a secured line of credit, you’ll need to offer your lender a form of valuable collateral. This puts less risk on the lender, especially if you have less-than-stellar credit — plus, you may be able to obtain lower interest rates as well. For instance, when you apply for a HELOC, you’re borrowing against the equity of your home and using your house as collateral.

Business line of credit

A business line of credit works just like a personal line of credit, though these types of credit are specifically for business owners. Their credit limits may also be higher: Business lines of credit are typically capped between $100,000 and $250,000.

How does repayment of a personal line of credit work?

When you take out a personal line of credit, there will be a period during which you’re allowed to take money out — known as a draw period — and a period when you’ll need to repay the money — called the repayment period. During the repayment period, you’ll only be responsible for paying back what you borrowed.

Lenders may approach repayment periods differently — here are some of the most common approaches:

  • Draw period/repayment period: With this type of repayment process, there’s a set draw period, followed by a dedicated repayment period. This is the most commonly used method.
  • Balloon payments: This type of repayment process requires that consumers repay the entire balance once the draw period ends.
  • Demand line of credit: This structure allows for lenders to demand repayment of the line of credit at any time. This type of repayment plan is not common.

How do you get a personal line of credit?

  1. 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 check your credit score for free.
  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 banks and lenders that work for you. Some specialize in financing for low or no-credit borrowers, while others may be better for smaller amounts of funding.
  4. 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.
  5. 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.
glass piggy bank

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, like 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 doesn’t require collateral. Unlike personal lines of credit, however, personal loans have a fixed interest rate — plus, 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.

See Personalized Offers

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 would be better for you 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 during 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 may be 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 one.

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, like 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 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.

Still, a HELOC won’t be the best option for all borrowers. HELOCs typically come with closing costs — these can include a home appraisal fee, document preparation fee and title insurance, for instance. Plus, 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.

Personal line of credit: FAQ

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 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 typically reserved for those with good and excellent credit. You’ll likely 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. Plus, 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 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 or what you’ll owe each month. If you’d prefer fixed payments and a clear timeline for repayment, 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.

It may be difficult to obtain a personal line of credit that doesn’t require collateral if you don’t already have a good relationship with a financial institution (a bank, credit union or online lender). Unsecured lines of credit also require that you have a good credit score.

Since personal lines of credit are revolving forms of credit that allow you to borrow against a specified sum, there are several forms of credit that could be considered personal lines of credit including HELOCs.