Everything You Need to Know About Personal Lines of Credit

Personal lines of credit are flexible ways of borrowing money that allow you to use (and pay back) only what you need. Because of this flexibility, personal lines of credit may allow borrowers to spend and ultimately owe less money — budgeting only for the expenses they absolutely need to cover.

They can be beneficial for anyone who knows they have a major upcoming expense but isn’t exactly sure what the final amount will be. Read on to learn if this method of borrowing is the right choice for you.

How do personal lines of credit work?

As previously mentioned, personal lines of credit allow you to borrow what you need and repay only that amount. Unlike personal loans, which are borrowed in one lump sum and have a set interest rate, what you owe on personal lines of credit (and the amount of interest paid) will depend entirely on what you spend.

With personal lines of credit, you’re given a credit limit — which is the maximum amount you can borrow. Within that limit, you can choose exactly how much you actually spend. Once you’ve borrowed a certain sum, if your account remains in good standing, it’s sometimes possible to pay down what you owe and then borrow up to your account limit again.

Personal lines of credit typically range from $1,500 to $100,000, with interest rates typically between 9.24% and 18%. Like any line of credit, interest rates tend to be variable — meaning they can change over time. The exact details (including credit limit and interest rate) of the loan you qualify for will be determined based on things like your credit score, debt-to-income ratio, and whether or not the loan is secured.

Just like any other kind of loan, secured loans (those which are backed by collateral such as a car, home, or another expensive personal item) may be offered at lower interest rates than unsecured loans.

How do you get a personal line of credit?

The actual process of applying for a personal line of credit is very similar to that of applying for a personal loan. If you're wondering how to get a loan — you’ll need good-to-excellent credit, an acceptable debt-to-income ratio, and proof of stable income. How much you qualify for (and your interest rate) will vary based on these factors.

Once you’ve contacted your bank of choice and given it the required information, the timeline for approval will vary. You should expect to provide some basic contact info, as well as information about your current employer and income, plus the details on any outstanding debt you owe. Some banks, like Wells Fargo, may allow you to apply online and give you a decision within minutes.

Funds might also be available relatively quickly — even as soon as the next business day after approval. Check with your bank to get exact details on timelines for approval.

What’s the difference between a HELOC and a personal line of credit?

Although home equity lines of credit (HELOCs) and personal lines of credit operate on the same basic principle of only borrowing and repaying what you need, as well as being able to use the loans to fund just about anything, there are a few fundamental differences to keep in mind. The first is that HELOCs are secured loans, backed by your home equity. Home equity refers to the value of your home minus the mortgage. In other words, your home equity is the part of your home’s total net worth that you actually own.

Since HELOCs are secured loans, they often offer more competitive interest rates than personal loans. They may even allow you to borrow more money than you’d be able to get with an unsecured personal line of credit. When considering a HELOC, you should keep in mind that you’ll be putting your home on the line as collateral, whether you use the mortgage lender that owns your loan or not, and like personal lines of credit, interest rates for these loans are typically variable and may increase over time. Our list of the best mortgage lenders is a great place to start your search.

What’s the difference between a personal loan and a personal line of credit?

The main difference between a personal loan and a personal line of credit is the loan terms — as in, the amount you’re borrowing. With a personal loan, this amount is fixed and determined from the get-go, whereas with a personal line of credit, the amount you owe can change over time as you continue the process of borrowing and repaying.

Personal lines of credit allow for more flexible borrowing and may be better suited for those with projects of unspecified amounts, like remodeling a home or starting a business. If you’re in need of a set amount of money — for example, to pay medical or tuition bills — then a personal loan might make more sense.

Because of the added benefit of flexibility (which translates into more risk for lenders), personal lines of credit tend to have higher interest rates than personal loans. They may also be more difficult to qualify for, especially if you don’t have great credit. When it comes to repayment, keep in mind that personal loans will have fixed payments over a set period, whereas personal lines of credit may have variable payments based on how much money you borrow and current interest rates.

Is a personal line of credit a good idea?

Trying to decide whether or not a personal line of credit is the right choice for you? Here are a few points to think about:

When to consider a personal line of credit

• You know you’ll need to borrow some money, but you aren’t exactly sure how much.
• You have a stable income and know you’ll be able to afford repayments, even if the amount changes over time.
• You have excellent credit and qualify for the best interest rates — making this a much more affordable option than borrowing on a credit card.

When a personal line of credit may not be the right option

• You know the exact amount you need to borrow — in this case, a personal loan may make more sense.
• You’d like to have a steady, reliable repayment schedule.
• You don’t have the best credit score, so you may not qualify.

What are the alternatives to personal lines of credit?

If a personal line of credit doesn’t seem like the best choice, you could also consider getting a personal loan, HELOC, or low-interest credit card. If you know in advance that you’ll need to borrow a significant sum but will also be able to repay it within a year, then getting a 0% intro APR (annual percentage rate) credit card like the Chase Freedom Unlimited or Capital One Quicksilver Cash Rewards Credit Card might work well — so long as you repay the debt before interest rates increase.

The final word

Whatever method of borrowing you choose, be sure to have a solid plan for how to pay off debt. Weigh the pros and cons of each choice. Carefully decide whether or not it makes sense for you to borrow using collateral (such as your home); also consider your income and how much you’ll reasonably be able to repay as time goes on.