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A personal line of credit can help you cover expenses whenever you need some extra cash. It works kind of like a credit card in that you have access to a certain limit, but you only pay interest on the amount you use.
A personal line of credit can be a good option when:
- You have unpredictable ongoing expenses, like a home improvement project
- Your income isn’t dependable, like freelancing or other seasonal work
Although personal lines of credit can be a good choice, they’re not your only choice. Alternatives such as credit cards or personal loans can be better options depending on your situation. We’ll help you figure out which is right for you.
In this post:
- What is a personal line of credit?
- Where to get a personal line of credit
- How a personal line of credit works
- Personal line of credit alternatives
What is a personal line of credit?
Like a credit card, a personal line of credit is revolving credit. That means it’s reusable. You’re pre-approved to borrow money when you need it, right up to a predetermined borrowing limit. When you pay down debt, you have more room to borrow up to your limit again.
Just like personal loans, personal lines of credit may be secured or unsecured. An unsecured line of credit doesn’t require any collateral. But you can often get a better interest rate — and a bigger loan — if you put something of value up as collateral.
Personal lines of credit may be secured by:
- Your home (when opening a Home Equity Line of Credit, or HELOC)
- A bank savings account or Certificate of Deposit (CD)
This comparison table can help you decide when to use a personal loan, credit card, or personal line of credit.
| Best uses | Loan amount | |
|---|---|---|
| Personal loan |
| Up to $100,000 |
| Credit card | Essentials | $10,000 limit is typical |
| Unsecured line of credit | Unpredictable or ongoing expenses | Up to $100,000 |
| Secured line of credit (CD or savings account) | Ongoing expenses | Up to $250,000 |
| Home equity line of credit (HELOC) | Home improvement | Up to 85% of home’s appraised value (minus first mortgage) |
Where to get a personal line of credit
Personal lines of credit are not offered by some big banks, like Chase and Bank of America. But it’s not hard to find a bank or credit union that offers secured or unsecured lines of credit to their customers. If you maintain a large balance in your checking or savings account, you could qualify for a relationship discount or an autopay discount for making automatic payments.
Here are some features of lines of credit offered by banks and credit unions:
| Loan amount | Annual or origination fee | Relationship discount | |
|---|---|---|---|
| Citi | $1,500 to $25,000 | $50 annual fee (waived if you take a loan or make a payment) | 0.25% |
| PenFed Credit Union | Up to $25,000 | Check with lender | Check with lender |
| PNC Bank | $1,000 to $25,000 | Check with lender | 0.25% |
| Wells Fargo | $3,000 to $100,000 | $25 annual fee | Up to 0.5% |
How a personal line of credit works
Once you qualify for a personal line of credit, you’ll have access to your money through a draw period, or a set amount of time you’re allowed to withdraw money from your account. Draw periods usually last a few years, during which you often have the option of only making minimum payments when you borrow.
- After the draw period ends, you’ll start the repayment period in which you’ll start paying off the full balance and any accrued interest.
- Interest begins to accrue when you start to withdraw money, and you’ll need to make at least the minimum payments to continue having access to your line of credit.
- The annual percentage rate (APR) is typically variable, with an initial rate that’s based on your creditworthiness. Typically, the higher your credit score, the lower your APR.
- Some lenders offer fixed-rate lines of credit, and you may also have the option of converting a variable-rate line of credit to a fixed interest rate.
Learn More: Comparing Credit Score Ranges
How to qualify
Qualifying for a personal line of credit is a lot like qualifying for a personal loan or credit card. Most lenders will take applications online, at a branch office, or over the phone.
You’ll need:
- To have your information ready: Be ready to provide your income, and authorize the lender to check your credit. Your credit score can determine whether you’ll be approved, and what interest rate you’ll be offered.
- A good credit score: Some lenders can provide you with rates using a “soft” credit inquiry that doesn’t affect your credit score. If you then decide to submit an application, you’ll be asked to authorize a hard credit inquiry, which can take 5 to 10 points off of your credit score.
- Proof you can pay back your loan: In addition to meeting the lender’s minimum credit score requirements, you’ll need to be able to prove that you have enough income to pay back your loan. If your debt-to-income ratio is too high, you won’t be approved.
Personal line of credit alternatives
Opening a personal line of credit can help you deal with unexpected ups and downs in your income and expenses. But a lot depends on your specific situation and needs.
A personal line of credit may not always be the right choice. Here are some situations when you might want to consider an alternative:
If you want to consolidate debt
If you’ve racked up a lot of high-interest credit card debt, you might be able to pay it off with a personal loan at a lower interest rate. As long as you don’t keep racking up new charges on your credit cards, you know exactly how much to borrow, so there’s no need to pay more for the flexibility of a personal line of credit.
If you need to do a major home renovation
If you’re planning a costly, major home renovation like an addition or rebuilding your foundation, a home equity loan or cash-out mortgage refinance might be a better choice. By putting your home up as collateral, you can get a lower interest rate that may save you thousands in interest.
If you need help paying for essentials
If you need short-term help paying for essentials like groceries or child care that usually fit into your monthly budget, pulling out your credit card might save you money. As long as you pay your balance off in full every month, you won’t see interest charges rack up. Many credit cards offer rewards, while a line of credit doesn’t.
If you have unexpected medical bills
If you’ve got an unexpected, one-time medical bill from an unexpected accident or illness, a personal loan can be a better choice. Since you know exactly how much you need to borrow, there’s no need to pay a higher interest rate for the convenience of a revolving line of credit.
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