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Personal Line of Credit

What’s a personal line of credit and where do I get one?

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Whether you’re planning to go on a once-in-a-lifetime vacation, renovate your home, plan a wedding or require urgent funds to tide through an emergency, it’s always good to know that you have extra cash to tap on immediately when you need them. With a personal line of credit, you can access funds anytime without having to apply and wait for approval.

Find out more about this type of loan and if it’s right for you.

What is a line of credit?

A line of credit is a form of personal loan that acts like a credit card. Unlike a personal loan, a line of credit has an open-ended loan tenure that allows you to conveniently draw on funds in the form of a revolving line of credit. You pay towards your balance and the accrued interest in monthly instalments, and you can access more credit (to a predetermined limit) as and when you need to. Compared to personal loans, a line of credit typically come with higher and variable interest rates.

How does a personal line of credit work?

A line of credit works much like a credit card, giving you access to a specified credit limit to use at your discretion. The main difference between a credit card and a line of credit is that the credit limit is usually higher on a personal line of credit, while the rates tend to be relatively lower than credit cards. You also won’t need to submit a credit application every time you need to make a withdrawal.

Generally, a line of credit can be more beneficial for someone looking for continued access to an amount of funds, whereas a personal loan may suit someone intending to make a large purchase or other singular expense.

Once you’re approved, the funds are available for you to use when you need them. You are not charged against your entire balance, only on the funds you withdraw. Some line of credit facilities is linked to debit cards, allowing additional flexibility on how you use the funds.

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

There are a number of key differences between a line of credit and a personal loan that you should consider before choosing which one is more suitable for your needs:

Line of credit

Lines of credit have a maximum credit limit and you’ll only be charged interest on the funds you actually use, as opposed to the entire credit amount.

Repayments are made monthly but there is no fixed “term” for a line of credit. As long as you’re making your minimum monthly repayments, your funds will always be available to you.

If you need access to more funds, your lender may also provide an option to increase the maximum credit limit in line with your specific needs.

Personal loan

A personal loan is a general-purpose loan that provides your funds upfront but has to be repaid in instalments within a predetermined loan term.

Interest is applied to the total amount and calculated for the duration of the loan, regardless if you use the funds or not.

Lenders may offer a discount if you take out a significant loan amount.

Unlike a personal loan in which the whole amount is transferred into your account, a line of credit grants you access to a credit limit, but the funds remain where they are until you decide to use them.

Here are the various features of personal loans and line of credit and how they differ:

Personal LoansLine of Credit
FeaturesA general purpose loan that lets you borrow a fixed amount of money over a fixed term, typically at a fixed rate of interest.A credit line that can be accessed at any time for any type of expense and will remain open as long as you don’t exceed the preset borrowing limit.
Loan typeTerm loan ranging from one to seven years.Revolving.
Repayment scheduleFixed monthly paymentMinimum monthly payment on the borrowed amount
Loan amountTypically 4 to 10 times your monthly salary. Borrowing limit for unsecured loan capped at 12 times your monthly salary due to MAS regulations.Typically 2 to 4 times your monthly salary OR; 10 times if you earn more than S$120,000 p.a.
Interest ratesFrom 3.7% to 5.43% p.a.From 18.5% to 19.8% p.a.
FeesOne time processing fee from 1% to 3% (and usually up to a maximum of $200)Ongoing annual fees from $80 to $100 p.a. May come with 1-2 years waiver.

Read more: How a line of credit varies from a personal loan

How to compare personal lines of credit

If you’re considering taking up a personal line of credit, it’s important to compare your options and find the loan that’s right for you. Here are some features to keep in mind when considering the products available:

  • The interest rate. Not only will you want to compare different interest rates, but you will also want to learn how they are calculated. Check that interest is only being applied on the funds you have withdrawn, not on your total balance. Keep in mind that in some cases, you may have the option of securing the loan against an asset, which could result in a lower interest rate.
  • The fees. Compare fees carefully as they are not always set out clearly. While a personal line of credit may advertise no annual fee, there could be monthly fees or an establishment fee that will result in an increase in the overall cost of the loan. Make a running list of fees for each product you are considering and factor that into your loan amount. Most lenders also have a personal loan calculator on their website for you to calculate your expected monthly instalments.
  • Repayment terms. There are two types of personal lines of credit. There are term-plan line of credit facilities in which you have a certain time frame (usually one to five years) to pay off the amount you borrowed. The other type of personal line of credit will allow you to keep the loan open so long as you continue to make regular monthly repayments. This is known as revolving credit and might be appropriate for those who want a funding source available as a safety net for unexpected expenses.
  • How accessible your funds are. Another thing to consider with this type of loan is how you will access your funds. Again, read the terms carefully. While a bank may offer a card that you can use at ATMs, there could be charges applied for this convenience. You are going to want to weigh the methods of accessing the funds along with any fees associated with them.

Things to consider

Pros

  • You’re (usually) only charged for what you use. In most cases, you will be charged interest only on the funds you have borrowed as opposed to the total loan amount.
  • You have easy access to your funds. If your account is linked to a card, you are able to draw the funds you need through ATMs and online banking.
  • There are flexible terms. You can use the funds how and when you want.
Cons

  • Fees and charges. Be mindful that fees and charges will likely apply, such as an annual fee, establishment fee or a monthly service fee.
  • Overspending. For individuals with little financial control, the thought of a seemingly unlimited amount of funds may cause them to make unnecessary purchases.
  • Penalties. While the repayments for a personal line of credit are generally flexible, you should make sure that you scrutinise the terms carefully. Most will expect at least monthly repayments and charge penalties if that requirement is not satisfied.

What are the risks?

Take note of the following risks that may come with a line of credit:

  • Overspending. For some individuals, access to a large amount of credit may cause them to make unnecessary or otherwise unaffordable purchases.
  • Penalties. While the repayments on a personal line of credit are generally flexible, you should make sure that you read the terms carefully. Most will expect at least monthly repayments and may charge penalties if that requirement is not satisfied.

How to apply

Compare your personal line of credit options online. The eligibility criteria will differ between lenders, so make sure to check this carefully before submitting your application. However, you will generally be asked to provide the following information:

  • Income. You will have to show proof of an ongoing steady income. Your payslips are usually acceptable, or a bank statement which shows consistent deposits from an employer.
  • Liabilities. You are going to be asked to provide a complete list of your currents debts.
  • Identification. All lenders will need to see a current and valid photo ID of the applicant and in most cases, you will be asked to provide a photocopy for their records.
  • Assets. Information regarding your home if you are a homeowner, plus any vehicles you own and any savings and investment accounts in your name.
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