Pros and Cons of Personal Lines of Credit: What You Need To Know

A personal line of credit (PLOC) allows you to borrow money repeatedly up to your credit limit and pay interest only on the funds you use — like a credit card. This structure makes personal lines of credit useful for recurring expenses or projects with uncertain total costs. But they can have lower APRs than credit cards.

Still, there are some downsides to choosing a PLOC, including potential fees and variable interest rates. We'll help you decide when a PLOC makes sense financially and when you should consider other options, like a personal loan or credit card.

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What is a personal line of credit (PLOC) and how does it work?

A personal line of credit is a type of revolving credit — you can withdraw money up to a limit on an ongoing basis. Banks and credit unions typically offer PLOCs and may require you to be an existing customer to get one. When you need cash, you can access your credit line through a variety of ways, depending on the bank. For instance, U.S. Bank provides a Visa access card (similar to a credit or debit card) plus ATM access, digital transfers, in-branch access, and checks. You may pay a transaction fee or an annual fee associated with keeping the credit line open.

“A personal line of credit can either be secured (backed by a bank account, savings, or CDs) or unsecured (based on the borrower's creditworthiness),” says Dan Hummert, CFP, President & Senior Financial Advisor at Hummert Financial. “Lenders that are offered some form of collateral are naturally going to provide a lower rate of interest, since their overall risk is less,” he says.

The APR on a personal line of credit depends on the lender you choose, whether you offer collateral, and how you use the credit line. You may spend less if you repay each draw within a short period compared to borrowing the full project cost as a lump sum.

PLOCs typically involve two stages: the draw period and the repayment period.

• Draw period: During the draw period, which may last between 2 and 10 years, depending on the lender, you're generally required to make interest-only payments on the funds, depending on how the PLOC is structured. As you make payments, your credit line replenishes, and you can continue to borrow.
• Repayment period: During the repayment period, which may last 5 to 15 years, depending on the lender, withdrawals are no longer permitted. You must pay off the remaining balance in installments.

Personal line of credit rates and features

What are personal lines of credit used for?

Like personal loans, personal lines of credit can be used for a variety of household expenses, from home improvement projects to IVF treatment. A PLOC may be a good option if you're expecting a series of ongoing or uncertain expenses that you'll pay over time, such as a wedding or basement remodel. PLOCs are also useful for smoothing out cash flow issues if you receive irregular income. Some people use a PLOC as an emergency fund, and some banks and credit unions allow you to use your line of credit as overdraft protection.

Pros and cons of personal lines of credit

Pros

• Ongoing access to cash: You can draw money against your line of credit repeatedly during the draw period without needing to reapply or authorize a credit check.
• Only pay interest on the money you draw: Instead of paying interest on the full amount of credit you're approved for, you only pay interest on the funds you draw. This could save you money compared to a personal loan or other installment loan if you're making purchases over time, especially if you pay more than the minimum each month.
• Interest-only payments initially: Some PLOCs come with interest-only payments during the draw period, which can be helpful if you expect your financial situation to improve but need more wiggle room during the first few years.
• Flexible use of funds: You can use a personal line of credit for a variety of expenses. If an emergency arises while your PLOC is open, you can get the cash you need right away rather than going through the application process for a loan.
• Lower interest rates than credit cards: While a PLOC is similar to a credit card in that it allows ongoing borrowing, the rates are typically lower, especially for borrowers with excellent credit. The average credit card APR was 21.16%, according to the Federal Reserve, while personal line of credit rates start around 8% to 13%, depending on the lender.

Cons

• Higher interest rates than some other loan types: Personal loan rates typically start lower than PLOC rates. Secured loan options, like home equity loans and home equity lines of credit, also come with lower interest rates.
• Possible fees: Some personal lines of credit come with fees, such as transaction fees and annual fees, that impact the borrowing cost.
• Variable interest rates: Most PLOCs have variable interest rates, which means monthly payments can fluctuate. You may end up paying more in interest than you planned based on your initial APR.
• May require an existing account: You may be required to have a bank account with the institution offering the PLOC, which limits your options.
• Fair- and poor-credit borrowers may not qualify: Financial institutions tend to have strict credit score requirements for PLOCs, but local credit unions may be more flexible. Savings-secured or stock-secured PLOCs may also be easier to qualify for.
• Temptation to keep borrowing: Todd Christensen, author and Education Manager at Money Fit by DRS, a nonprofit credit counseling agency, says that PLOCs pose a “risk of ongoing temptation to borrow for non-priority items or activities, which can lead to long-term debt if not managed carefully.”

“Disciplined borrowers who cap the amount they borrow and consistently make on-time payments are strong candidates for a personal line of credit,” says Hummert. Plus, if you pay more than the minimum payment each month, Hummert says you'll pay off less and get out of debt faster.

“Those lacking fiscal discipline are likely to face not only higher interest costs, but also the emotional stress that comes from increasing debt,” says Hummert. In other words, if you need a strict repayment schedule to stay motivated, a personal loan might be a better choice for you.

How do PLOC compare to other options?

PLOC vs. personal loans

Personal loans are a type of installment loan. You receive a lump sum of cash, which you repay in fixed monthly installments over several years. Personal loans are generally a better option if you're paying the full cost of the expense upfront — for example, personal loans work well for debt consolidation.

The repayment structure of a personal loan may also be preferable for people who have difficulty staying on top of their finances. “Paying back a personal loan is often easier because of its predictable monthly payment compared to a credit card or even a line of credit,” says Christensen. “So, it might be appropriate for anyone who's struggled with budgeting.”

PLOC vs. credit cards

Some credit card issuers offer 0% introductory APR promotions to new cardholders, which helps you avoid interest for six to 21 months, depending on the card. Many credit cards also offer travel rewards, cash back, or other perks. But in other ways, credit cards are very similar to PLOCs. They both have a credit limit from which you can borrow repeatedly. They both charge variable interest only on the amount of credit you use. And a PLOC often has a physical card you can use, like a credit card, to make withdrawals.

However, credit cards don't typically charge transaction fees or draw fees. They're also more widely available, and there's no official draw period, meaning you can make purchases indefinitely. On the flipside, there's no interest-only period and rates tend to be significantly higher. In other words, credit cards are best for recurring expenses that you can pay off quickly.

PLOC vs HELOC

A home equity line of credit (HELOC) is a form of revolving credit similar to a PLOC, except that it is secured by the equity in your home. A HELOC may have a longer draw period than a PLOC. Because HELOCs are secured by your home, they typically come with lower APRs than PLOCs. Depending on the lender, the application process may also be lengthier, and you may need to pay for a home appraisal and other closing costs.

How to get a personal line of credit

1. Check whether your bank or credit union offers PLOCs and research other options.
2. Check your credit score with Credible's free credit-monitoring tool and add up your sources of income.
3. Prequalify online with your financial institution and a few others, if possible.
4. Compare the interest rate, fees, repayment terms, and other features of different options.
5. Choose a PLOC and open a checking account with the bank or credit union (if required).
6. Authorize a hard credit check and proceed with the formal application.
7. Provide necessary documents, like your employment info and proof of income.
8. Read the terms of your credit agreement carefully.
9. Sign the agreement to access the funds.