The purpose of a personal line of credit is to help people who may not have the money to get traditional banking services. You can use it to refinance existing debt, buy cars, houses, food, clothing, and other essential items. That’s why it’s necessary to know the pros and cons and how you can use it effectively to help yourself out of financial difficulties.
There are pros and cons to every type of personal loan. The more you know about them, the better you will be able to choose what’s best for you!
What is a Personal Line of Credit, and How is it Different From a Personal Loan?
A personal line of credit (PLOC) is a type of personal loan, or advance, provided by a commercial bank or financial institution to someone throughout a specified repayment period.
The purpose of a personal line of credit is to help those under financially strained because of their inability to make regular payments toward their existing debt obligations and other necessary expenses.
How is a Line of Credit Different from Personal Loans?
Personal lines of credit are similar to traditional credit cards and personal loans. Nevertheless, there are a few factors that make it unique. While a personal loan is a lump sum delivery of funds, a personal line of credit is a tool that lets you borrow money in several installments (using your discretion).
However, a line of credit doesn’t have a fixed interest rate. As a result, interest rates will continue to accrue, making it more difficult to meet monthly payment requirements.
Where to Get a Personal Line of Credit?
A personal line of credit can function as a flexible funding source for managing debt, advancing a business, or renovating a home. Although Wells Fargo no longer does, several other banks still offer personal lines of credit. Depending on your circumstances, a personal line of credit could be a valuable resource in your quest for financial success.
To help you find the right personal line of credit, we’ve compiled a list of banks and their interest rates.
| Bank | Annual Percentage Rate | Loan Amount | Loan Term |
| Wells Fargo | 10.50% – 22.00% variable rate (as of 1/2/19) | $3,000 – $100,000 | 1 to 5 years |
| PNC Bank | Starting at 11% | $1,000 – $25,000 | Flexible |
| TD Bank | 10.50% – 15.50% with AutoPay | $20,000 – $50,000 | Draw period of 10 years followed by a 10-year repayment period |
| Citibank | 10.49% – 22.49% variable rate | $1,500 – $25,000 | Flexible |
| US Bank | 12.50% variable rate | $5,000 – $25,000 | Flexible |
| Regions Bank | 9.74% – 19.75% with AutoPay | $3,000 – $50,000 | Flexible |
| KeyBank | 10.74% – 15.99% | $2,000 – $50,000 | Flexible |
| Santander | 9.74% – 18.00% variable rate with ePay | $5,000 – $35,000 | Draw period of 5 years followed by a repayment period of 5 years |
Pros and Cons Personal Line of Credit
Specific cases aside, if you’re choosing a personal line of credit for convenience reasons (e.g., you don’t have enough leftover money at the end of the month), then it’s generally a good idea to know the terms of your line of credit.
Do they include realistic interest rates? Pay-off terms? What happens if you violate the terms? Are there consequences for failing to pay off the debt in full? Knowing the answers to these questions could help you make an informed decision when choosing a personal line of credit.
PROS
A personal line of credit is a simple and convenient way to obtain capital. Below are some of the benefits of using personal lines of credit:
1. Convenience and Flexibility
To tap into funds, it takes time to qualify for them, and the longer it takes, the more money is lost. In addition, most other loans have a limit–you can only get up to an approved loan amount.
A personal line of credit provides you with quick and constant access to how much you need and when you need it, making it great for emergencies.
Because of the flexible structure of a line of credit, such loans can meet many different financial goals and are especially suitable for long-term projects with unpredictable costs. Further, you are permitted access to 100% of your credit limit without any limitations.
2. Expenses Under Control
Because the interest is only incurred on the borrowed funds, you may be able to use your credit line without sinking deeper. This can be a godsend in situations where you don’t want to be locked into costly auto loans or credit card agreements.
It can also help you save money in the long run if you pay off your balance more quickly than expected. Although these types of loans come with certain limitations and conditions (depending on the lender), you must read them carefully before deciding whether you can fully commit.
3. Save on Additional Costs
Personal credit lines are generally lower in the APR range compared to credit cards. Additionally, no collateral is required for unsecured credit lines, but it is also possible to provide collateral for lower-interest, competitive rates (secured loan) also.
4. Flexible Repayment Terms
Lines are credit are comparable to credit cards, but you have multiple repayment options to choose from to get one that better suits your financial situation.
Better terms mean timely payments as well. Regular, timely payments can also be an excellent way to make your credit work.
CONS
1. Any Type of Debt Accumulated Can Negatively Affect your Credit Score
The bill for paying back a personal line of credit may seem less demanding than paying off a high-interest credit card or other debt.
However, people who apply for a personal line of credit may not be able to build their scores as easily as people with excellent credit histories. So if you have other debts, it might make it more difficult to meet monthly payment requirements, making it harder to offset your credit score and causing it to fall even further.
2. Risks Associated with Unsecured Loans
Lines of credit and other similar loans are considered unsecured loans because the lender does not require collateral. However, because the financial institution assumes all risk, interest rates are slightly higher.
3. Possible High Credit requirements
Due to the unsecured nature of the loan and the fact that, in some cases, the credit line can be several hundred thousand dollars, a credit score of over 700 is commonly expected.
4. Fluctuating Rates
In general, variable rates are designed to change frequently with market conditions. Thus, when interest rates go up, so does the variable interest charged on personal lines of credit.
Yearly or monthly maintenance fees regardless of use and interest expenses are also non-deductible. This is part of why you want to make sure you understand the interest rate on your credit line before applying.
5. Prone to Spending Temptations
The ease of access can facilitate spending to fill short-term cash shortages. However, this is not a practical solution for long-term cash problems unless you are a responsible borrower.
Make sure to discipline your spending habits to keep you from recklessly using your loans. A line of credit will typically have a credit limit, but remember that you are not dealing with fixed-rate loans–it’s better to keep your spending within a manageable range.
Personal Line of Credit Repayment Structure
Personal lines of credit are most often structured similarly to a credit card. In addition, there are alternative structures available that might make for favorable terms that better fit your situation.
The following is a breakdown of the various structures and how they work.
1. Draw Period and Repayment Period
When personal lines of credit are introduced, lenders typically set up a set draw period during which the funds are accessible to the borrower for a limited period of time.
Repayment follows the draw period and is based on the borrower’s borrowing habits. This is the point where you begin paying off your debt.
The draw and repayment periods are designed to ensure the borrower does not have access to funds during the repayment period, thereby preventing them from defaulting on their monthly payments.
2. Balloon Payment
Some personal lines of credit may require full repayment of the approved loan amount at the end of the loan term. This repayment structure is called a balloon payment. Refinancing may be necessary if a balloon payment is not able to be repaid fully.
3. Demand Line of Credit
Financial institutions offer demand lines of credit to borrowers who cannot make regular loan or credit card payments.
Any time the lender requests repayment, they may require the borrower to repay the balance. As a way to encourage the borrower to make additional payments toward the principal, the lender may also extend the payment deadline for the unpaid debt.
How To Apply for A Personal Line of Credit?
If you want to qualify for a personal line of credit, you’ll need to provide your earning history as well as verification of employment.
Additionally, you will need a credit score of 690 or above along with a sterling history of credit.
Some lenders grant personal lines of credit only to applicants who have a checking account with them or have applied at a regional branch (which comes with several restrictions).
Generally, to qualify for a personal line of credit, one must fulfill the following basic requirements:
1. Payment History
The lender will evaluate your creditworthiness by reviewing your recent financial information and current obligation status.
You may have trouble meeting the lender’s criteria if you have been delinquent in making monthly payments in the past. Your financial history must reflect that you can be a responsible borrower.
2. Credit Score
In other words, a credit score is a number that lenders or creditors use to determine if you are eligible for a loan, the amount you can expect to qualify for and whether you will be able to repay the loan. This is how financial institutions determine if you are worth lending money to.
3. Financial Condition
Take the time to understand your own financial circumstances to determine whether you can cover the lump sum and minimum monthly payments. In addition to other potential fees, lenders typically charge annual or monthly maintenance fees on personal lines of credit.
Banks will also review your financial status during the loan application for your personal line of credit. Banks will take a look at your credit score and your income. They will also consider your expenses and if they are manageable or not. The bank will also review your current debt before deciding to give you a personal line of credit.
Takeaways
- An unsecured personal line of credit is a type of revolving credit account that offers a certain limit on how much you can borrow.
- Unlike secured loans where the collateral is put up against the loan, a personal credit line does not require any collateral to be made available.
- Balance and timing before applying for a personal credit line are important to maintain a healthy financial discipline.
- A Personal Line of Credit is a great asset to have when you’re financially responsible.
- Personal lines of credit offer flexibility with your spending habits and come in handy in securing financing for major purchases. But it comes with risks and costs. Know what you are getting into before applying.
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