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What is a personal line of credit?
This type of financing offers access to cash as you need it — but with few options to compare.
A personal line of credit is like a personal loan that allows you to withdraw cash as needed. You only pay interest on the amount that you draw and can usually access it for an unlimited period of time. And generally, lenders don’t require collateral.
This makes it a good option for ongoing projects or expenses that are difficult to predict. But only a handful of lenders offer lines of credit to individuals. This means rates and terms might not be as favorable as you’d find with other products.
What can I use a line of credit for?
Lines of credit are a good choice in two situations: When you can’t predict the cost of something or when you need access to funds over a long period of time. Here are some common ways that people use lines of credit.
- Home improvements. These projects can have unpredictable costs that typically require cash and a higher credit limit than you’d find with a typical credit card.
- Rainy-day fund. Access to a credit line can be a helpful backup if your monthly income is inconsistent but your bills aren’t. It can also help cover quarterly taxes if you’re self-employed.
- Overdraft protection. Many banks offer lines of credit attached to checking accounts to help you avoid high overdraft fees.
- Business expenses. Business owners can use a personal line of credit as collateral on a business loan or provide financing for startups that are ineligible for loans or credit cards.
How personal lines of credit works
A personal line of credit works by giving you access to cash as you need it. Here’s how it typically breaks down.
- Credit limits. Credit limits typically run from $1,000 to $50,000 on a personal line of credit.
- Rates. Lines of credit often come with with variable rates starting around 9% APR, which are subject to change every few months.
- Draw limits. There’s also often a minimum and maximum you can withdraw at a time, usually from $100 to over $1,000.
- Fees. Some lenders charge annual fees to renew your credit line each year. Others charge a fee each time you make a withdrawal.
It can take between one business day to a few weeks to get your line of credit after you apply. Some lenders offer a debit card that you can swipe to access your credit line. Otherwise it typically takes between one and three days to receive a withdrawal.
Types of personal lines of credit
There are several different types of credit lines that serve different uses and borrowers. These are the most common personal lines of credit you’ll find.
Revolving line of credit
A revolving line of credit is an open-ended account that you can draw from indefinitely — up to your credit limit. Like a credit card, these come with minimum monthly payments, though you can pay off your balance in full at any time. They often come with an annual fee.
Close-end line of credit
These lines of credit come with a fixed term are popular for home improvements. It’s divided into two periods: A draw and a repayment period.
- Draw period. You can withdraw from your line of credit as needed to cover expenses for a project during this time. Typically this lasts around six months to five years and interest may or may not accrue during this time.
- Repayment period. Your lender converts the balance into a term loan, which you repay with fixed monthly repayments toward the principal and interest. This also usually lasts six months to five years.
In some cases, close-ended credit lines come with a balloon payment. In this case, you only pay interest for most of the term. At the end of the term, you then pay off the full balance in one large repayment.
Secured line of credit
While most credit lines are unsecured, some lenders might allow you to back it with collateral — usually a CD or savings account. Secured lines of credit are usually easier to qualify for and can either be fixed or revolving.
What about home equity lines of credit?
A home equity line of credit (HELOC) is secured by your home. It differs from a personal line of credit because the amount you qualify for is based off the equity you own in your home. Interest rates are generally lower than with a personal line of credit.
Pros and cons of personal lines of credit
Weigh the benefits and drawbacks of this type of financing before you apply.
- Lower APR than credit card
- Access to cash, rather than credit
- Credit limits up to $50,000 or higher in some cases
- Doesn’t require collateral
- Access money as needed
- Limits need to regularly apply for a loan
- Rates typically higher than a HELOC or personal loan
- Minimum monthly payments can lead to a high balance
- Potential expensive balloon payments
- Not as common as other types of financing
- Variable rates make cost unpredictable
Compare lenders that offer personal lines of credit
How can I apply for a personal line of credit?
You can follow these steps to find a lender and apply for a line of credit.
- Choose a type of credit line. Revolving lines typically work better as an emergency fund, while close-end lines of credit can help cover a project.
- Compare lenders. Find providers offering the type of credit line you want and compare rates, fees, credit limits and requirements.
- Prequalify. Many lenders will give you an estimate of the rates and credit limits you might qualify for, based on a quick application. Use this to make your final choice.
- Complete the application. Follow your lender’s directions to complete the application and submit documents verifying the information you provide.
What do I need to qualify?
Eligibility requirements vary depending on the lender. But generally you need to meet the following criteria:
- Good credit. While it’s possible to find a line of credit at any credit score, you’ll have more options with a credit score of 670 or higher.
- Regular income. You must either have a steady job or proof that you bring in a relatively consistent income each month to qualify for most lines of credit.
- Low debt-to-income ratio. You might struggle to qualify if your monthly expenses are worth more than 43% of your monthly income.
- Age of majority. In most states, you must 18 to borrow. But in some, the age of majority can be as high as 21.
- US citizen or permanent resident. You typically need to have a green card or citizenship to qualfy for a line of credit on your own.
What information will my lender ask for?
In general, you will need to provide the following information:
- Proof of income. You’ll have to show proof of an ongoing steady income. Your pay stubs are usually acceptable or a bank statement which shows consistent deposits from an employer.
- Existing debt. You may be asked to provide information on your current debts, including your mortgage or housing payments.
- Identification. Most lenders will require government-issued ID to verify your identity.
- Assets. Lenders typically use savings and investment accounts as collateral for high-dollar lines of credit.
Alternatives to a personal line of credit
If you’re on the fence about whether a personal line of credit is right for you, there are a few similar options you might want to consider instead:
- HELOCs. Because HELOCs are secured by your property, you can typically borrow much more than with a personal line of credit. This can be useful for large projects or expenses like home renovations and college expenses.
- Personal loans. Personal loans are best if you need to cover a large one-time expense or purchase. You’ll receive your funds as a lump sum and pay it back plus interest with monthly repayments over two to five years.
- Credit cards. Credit cards have higher interest rates, but they’re much more accessible than lines of credit. And with a wide variety of options out there, a credit card can help cover smaller expenses as they crop up.
A line of credit can help you cover ongoing expenses when you’re not sure exactly how much you’ll need. They typically come with lower rates than a credit card — especially if you opt for a secured option backed by a CD or savings account.
Visit our guide to personal lines of credit to read about our picks for the best personal lines of credit.
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