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A personal line of credit (PLOC) is a type of flexible loan you can use whenever needed, paying back interest and principal only when you use the credit. This is different from an installment loan, where you repay the amount borrowed in full with interest over a fixed term.
The personal line of credit is available to you all the time, to a predefined maximum, and is often used by individuals to cover an income gap.
A personal line of credit shouldn’t be confused with a home equity line of credit or a business line of credit. A home equity line of credit allows you to borrow credit against your home. A business line of credit is similar to a personal line of credit but should only be used for business expenses.
How does a personal line of credit work?
You can apply for a personal line of credit from a lender. The lender will consider factors such as your income, credit score and credit history and debt before approving you. Depending on these factors, you’ll be approved for a predetermined amount. While you initially sign your personal line of credit with a specific interest rate, the interest rate can and will fluctuate based on market trends.
Since personal lines of credit are unsecured loans, they’re usually only approved for people with a good credit history and a credit score of 680 or higher. Individuals with excellent credit may be approved for a personal line of credit of up to $100,000.
Once you’re approved for the personal line of credit, the funds will be available to you via your account. You can take out funds using an ATM, a branch of your bank, your online banking system or a mobile app. Every time you withdraw money, you’ll need to repay it with interest. However, you only pay interest on the amount used, not the full credit line total.
Many PLOCs have an expiration date set into the contract. For example, an individual may be approved for a $5,000 personal credit line for two years. After the expiration date passes, the funds will no longer be accessible in your account.
A personal line of credit is the right solution for someone who needs to cover expenses for which they do not have the finances. While many people turn to credit cards or personal loans when they need to cover costs, a PLOC usually has a lower interest rate than other options.
Generally speaking, only people with good financial habits should consider using a PLOC. It can be very tempting to have access to a large sum of money in your account at all times. If you’re the type of person who has struggled with consumer debt before, a PLOC may not be the best choice.
Additionally, as the interest rate fluctuates on a personal line of credit, it can also be challenging to predict how much you’ll have to pay back. If knowing exact amounts is important for your budgeting, these types of fluctuations can be challenging..
What is a personal line of credit used for?
A personal line of credit should be used to cover income gaps or unexpected expenses. For example, a self-employed person who experiences a drastic dip in earned income one month can rely on their PLOC to cover their bills.
Additionally, if you have significant credit card debt or another loan at a high interest rate, a personal line of credit might help. If your personal line of credit has a lower interest rate, consider transferring your debt balance over.
A personal credit line shouldn’t be used for major purchases, such as a down payment on a house or buying a car. That’s because if you don’t have the cash for these purchases, then you’re likely not ready to buy them yet. A PLOC still charges interest, so when used for a large purchase over the long term, it can mean a significant amount of money lost on interest.
How to get a personal line of credit
The process for getting your personal line of credit can differ depending on your credit standing.
Check your credit
First, you’ll want to check to make sure you have good credit. A PLOC is usually an unsecured loan, so the bank only trusts individuals with a good credit score and solid credit history with this type of loan.
If you have a low credit score, you might consider improving it before applying for a personal line of credit. You can do this by paying off debts and making regular payments on bills. Increasing your credit score before applying can also improve your PLOC’s interest rate and the maximum amount you’re given.
However, even if you have bad credit, you still have some options for acquiring a PLOC. A lender may give you a PLOC even with a low credit score. To compensate, they may adjust the annual percentage rate, lower the total credit limit or possibly ask for collateral. The collateral can be requested in cash or asset form, and the lender may seize the collateral if the credit isn’t repaid.
Choose a lender
Next, you’ll want to choose a lender for your personal line of credit. You will likely have better luck if you use a lender you already have accounts with. This lender has history and experience with you, so there’s a level of trust already in place versus starting anew.
You can also ask each lender what they typically require in terms of credit scores for a PLOC approval. This way, if a lender requires a credit score out of your range, you’ll save time and avoid applying with them.
Submit an application
Now you’re ready to apply for a personal line of credit. Ensure you fill out all the information correctly and thoroughly so you’re not denied based on a mistake or missing field.
Alternatives to personal lines of credit
If you’re denied a personal line of credit, you do have other options you can consider. For example, you can choose an unsecured personal loan or a secured credit line. These loans are different from a personal line of credit because:
- You get all the money up front and need to pay interest on all of it.
- They usually have higher interest rates than a PLOC.
- There is a predefined payment deadline date for all the money to be paid back in full along with interest.
Additionally, a secured personal loan requires you to put cash or an asset on the line. If you don’t pay the money back, the lender can go after the asset or cash for payment.
Does a personal line of credit affect your credit score?
Yes, a personal line of credit can affect your credit score. As with all loans, your payment history will go into your credit history and therefore be a part of your credit score. If you are late or miss payments, it can negatively impact your credit score.
It can be very beneficial to have a personal line of credit when you’re in a tight financial situation and need some cash. Before you apply for a personal line of credit, make sure to check your credit score and ensure you’re in good standing. If your credit score is low, consider improving it so your chances of being approved for a PLOC increase. If you don’t know where to start, credit repair services can help you work on your credit score.
Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.
Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.