What Is a Personal Line of Credit (PLOC) and How Does It Work?

A personal line of credit offers a certain amount of money you can borrow during a set period of time, known as your draw period. Similar to a credit card, a personal line of credit is a form of revolving debt, though it typically offers a larger credit limit.

If you need to borrow money regularly but can’t pin down a total loan amount, a personal line of credit could be useful for large expenses, like medical bills or home improvement projects. Here’s a guide to help you better understand this borrowing option, and how it compares to other alternatives.

How a personal line of credit works

A personal line of credit is usually an unsecured loan, which means you won’t need a house or car as collateral in order to qualify. Much like a credit card, it typically comes with an adjustable interest rate, a fixed payment schedule and a credit limit on how much you can borrow. It will also have set periods for when you can draw — or borrow — money and when you have to repay it.

In many cases, you can only get a personal line of credit — or qualify for the best terms — if you’re already a customer with a particular lender, perhaps through a savings or checking account. If you do qualify, expect a credit limit in the range of $1,000 to $100,000, and possibly $250,000 or more if you have substantial financial holdings with the lender.

With a personal line of credit, you can usually borrow up to your credit limit, then borrow again after you’ve repaid what you owe plus interest. The length of time you can access funds depends on the lender — in some cases, it might be open-ended, with no set date for your credit access to expire.

Expect a few spending restrictions with a personal line of credit — for example, you may not be able to use it for investment or business purposes. The following expenses will likely qualify:

• Home improvement projects
• Car repairs
• Medical bills
• College tuition
• Refinancing student loans
• A major expense, like a wedding

Personal line of credit: Pros and cons

The biggest advantage of a personal line of credit is its flexibility. Unlike a personal loan and other financing options where you receive a lump sum of money upfront, a line of credit lets you withdraw funds as much — or as little — as you’d like. This means you won’t have to pay interest on any money you didn’t borrow.

Most personal lines of credits come with variable interest rates. Some lenders offer fixed rates, but a variable rate will increase and decrease with market conditions, so make sure you can keep up with monthly payments. But because a personal line of credit offers easy access to money, it might cause you to borrow more than you need or can afford.

Interest will start accruing on your account as soon as you start withdrawing funds, and you’ll need to repay what you owe according to a preset payment schedule. This usually means paying at least a minimum amount monthly. Some lenders may let you delay payments until after your draw period ends, while others may require you to repay the entire amount at that time in the form of a large balloon payment.

As with a credit card, every time you make a payment to a personal line of credit, the amount paid back raises your available credit (a plus for your creditworthiness) — but you’ll need to watch for payment terms.

The minimum payment you make may initially include interest only, or both loan principal and interest. It’ll vary depending on what you still owe, but you can expect to pay either a flat fee ($25, for example) or a percentage of your balance (say 1% to 2%), generally whichever amount is higher.

Besides interest charges, your personal line of credit may also come with an application fee, an annual maintenance fee (usually $25 to $50), late payment fees and a cash advance fee every time you take out money.

How interest is charged on a personal line of credit

As mentioned, interest rates on a personal line of credit can be variable or fixed. If your rate is variable, it can fluctuate over time, potentially leading to higher costs than you initially anticipated.

If you’d rather see all your costs upfront, look for a line of credit with a fixed rate. Fixed rates stay constant over the life of the loan, so you won’t have to worry about increasing interest charges.

What’s more, you can plan for consistent payments that stay the same month after month. (That said, variable rates often start lower than fixed rates.)

What fees are charged with a personal line of credit

Personal lines of credit can come with fees, which will vary by lender. Some common fees include annual maintenance fees, late payment fees and transaction fees, the latter of which a bank might charge each time you withdraw money. Some lenders will also charge an origination fee for giving you the loan.

When you’re comparing your options for a personal line of credit, make sure to ask the lender for its interest rates and fees so you can find a line of credit with the lowest costs of borrowing.

Different types of personal lines of credit

A personal line of credit isn’t the only type of line of credit out there. You might also come across business lines of credit and home equity lines of credit (HELOCs), and understanding how each of these financial products works can help you decide which one may be right for you.

Personal line of credit

If you have good or excellent credit, you might consider a personal line of credit. Lenders typically look for strong credit, since a personal line of credit is not backed by any collateral. This type of funding is usually best for consumers who need to cover some personal expenses in a short period of time.

Business line of credit

Business lines of credit work similarly to personal lines of credit, in that you’ll receive a limited amount of credit and can withdraw and pay it back as needed. Business lines of credit, however, are designed for businesses, so they typically have higher limits. You can usually use the funding for specific business purposes, such as the purchase of new equipment.

Home equity line of credit (HELOC)

A HELOC lets you tap into your home’s equity to receive a set amount of funding that you can then draw upon to pay for a variety of expenses. Like a line of credit, it has both a draw period (usually 10 years) and a repayment period, often 15 to 20 years. With a HELOC, you may be able to borrow up to 80% or 90% of the value of your home.

A HELOC comes with a variable interest rate, though it will likely be lower than for a personal line of credit. However, this type of loan is secured by your home. With a HELOC, you’ll also want to make more than just minimum payments during the draw period to avoid getting stuck with a huge repayment bill later on.

Unsecured vs. secured lines of credit

Some lenders may be willing to offer you a secured line of credit that comes with better terms — like a lower interest rate or larger credit limit — in exchange for collateral like a savings, certificate of deposit (CD) or money market account.

If you only have fair credit, a secured line of credit is likely to come with a larger credit limit and lower interest rate. An unsecured personal line of credit might be the better option if you have strong credit and don’t want to risk losing a valuable asset.

Where to find a personal line of credit

You’ll find a personal line of credit most often at a bank or credit union, although some online lenders offer them, too. Here’s a brief overview of each option:

• Banks: Both large national banks and smaller regional banks offer personal lines of credit, although many lenders will require you to already have a financial account with them. In some cases, you may also need to live near a local bank branch.
• Credit unions: You’ll most likely need to be a member to get a personal line of credit. Because of their not-for-profit status, credit unions are less likely to charge annual fees or application fees.
• Online lenders: An online lender may be able to get you a personal line of credit quickly — think access funds in just one business day. Online lenders often have more lenient lending requirements than banks and credit unions, but watch for lower credit limits. Some online lenders offer personal lines of credits in only a few states.

Here are some lenders that offer personal lines of credit to start your search:

How to apply for a personal line of credit

Since a personal line of credit is an unsecured loan, potential lenders will look closely at your credit score, income and other debts, as well as your overall ability to repay this type of loan. In general, to qualify for this type of loan, you’ll need good to excellent credit.

1. Check your credit. Visit AnnualCreditReport.com to get copies of your credit reports from Equifax, Experian and TransUnion. This way, you’ll know what kind of loan terms to expect with your particular credit history.
2. Decide how much you want to borrow. Pin down, as best you can, what your ultimate borrowing needs might be. For a large sum of money, a secured line of credit might come with a higher credit limit, lower interest rate and a longer draw term.
3. Research lenders and compare quotes. You can easily research lending options online to compare APRs, as well as maximum credit limits, minimum draw amounts and any potential fees or penalties.
4. See if you prequalify. Fill out a preliminary application online or in person. You’ll be asked to provide basic information about your income, employment and financial obligations. Some online lenders promise to reply within a few minutes.
5. Choose a lender and submit a formal application. Your lender will ask for documentation to prove your identity, income and employment status, so pull together documents like government-issued photo identification, pay stubs, tax forms and recent bank statements. At this time your lender will also conduct a hard credit check.
6. Start taking withdrawals. Once your application is approved, you may be able to access your line of credit in as little as one business day. Your lender may offer line-of-credit checks — a special card that works like a credit card or online access — so you can transfer funds directly into a savings or checking account.

How a personal line of credit compares with other loans

Here’s how a personal line of credit compares to other financial products: specifically, credit cards, personal loans and home equity lines of credit.

Credit card

Most credit cards come with an interest-free grace period of about 21 to 25 days as long as you pay off your entire balance by the end of that time. They often offer special perks too, like cash back, travel points or introductory zero-interest balance transfers that let you bypass interest charges up to 18 months if you pay off your balance by the end of that time.

A personal line of credit will probably come with a lower APR and a higher credit limit; however, expect stiffer qualifying requirements like a higher credit score.

Personal loan

With a personal loan, you borrow a set lump of money and repay it with interest via regular monthly payments over an agreed-upon term. Once you’ve used up a personal loan, you’ll need to apply for a new loan if you need more cash.

A personal loan is less flexible than a line of credit because you won’t be able to borrow money when you need it. Still, a personal loan also usually comes with a fixed interest rate, which can make it easier to budget loan expenses.

With both personal loans and lines of credit, you’ll need to watch for potential fees, and possibly a prepayment penalty for paying off your balance early. A personal loan may also come with an origination (or processing) fee that’s generally 1% to 8% of the total loan amount.

Payday and pawn loans

While payday and pawn loans may be an option for cash-strapped borrowers, we urge caution. These loans tend to come with sky-high interest rates that can make the loan unaffordable and trap consumers in a cycle of debt.

Payday loans are usually small-amount, short-term loans with high interest rates. Pawn shop loans also come with high rates, and you usually borrow them against a personal possession, such as jewelry or electronics.

While some payday lenders might offer fast cash without a credit check, they often charge predatory rates and fees. You might have the option to extend a payday or pawn loan similar to how you can with a line of credit, though you’ll likely rack up huge fees and interest charges along the way.