What Is a Line of Credit?

A line of credit is a loan that works like a credit card: You borrow only as much as you need and pay interest only on what you use.
Ronita Choudhuri-Wade
Annie Millerbernd
By Annie Millerbernd and  Ronita Choudhuri-Wade 
Updated
Edited by Kim Lowe

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Nerdy takeaways
  • A personal line of credit is money borrowed from a bank or credit union that you draw from as needed.

  • You pay interest only on the amount you use.

  • Interest rates are often variable, which means they can change over the loan term.

  • Personal lines of credit are ideal for ongoing or fluctuating credit needs.

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A personal line of credit is a loan you use like a credit card. You borrow a set amount of money from a lender but draw only what you need and pay interest only on the amount you use. Personal lines of credit are offered by banks and credit unions, and borrowers with good to excellent credit (690 or higher) typically get the best rates.

How does a personal line of credit work?

Upon approval for a personal line of credit, you receive a credit limit from a lender. Credit limits vary by lender, but a general range is $500 to $50,000. You use funds up to the limit as needed and pay interest on what you use rather than the full amount. It’s different from an installment loan, which you repay in full with interest over a fixed term.

Requirements for lines of credit vary by type and lender, but borrowers with good or excellent credit have better chances of getting approved at the lowest rates available. Personal lines of credit can have lower interest rates than personal loans and credit cards, but the rates are sometimes variable, so they can fluctuate.

Most lines of credit have two phases:

Draw period: Once approved for a line of credit, you’re in the draw period and can use the funds as often as you want. During this time, you’ll receive a monthly bill that shows any advances, payments, interest and fees. You’re responsible for minimum monthly payments or interest-only payments, depending on the lender. Paying more than the minimum payment allows you to pay less in interest over time.

Some lenders offer credit lines with continuous draw periods you can leave open.

Repayment period: After a predetermined amount of time, the credit line goes into repayment and you can no longer withdraw money. During the repayment period, you make principal and interest payments for the rest of the loan term.

Types of lines of credit

Personal lines of credit: Personal lines of credit are commonly unsecured. That means the lender uses only information about you — your credit, income and outstanding debts, for example — to decide whether you qualify for a line of credit. This information can also affect the amount and annual percentage rate, or APR, you receive.

Some banks may allow you to secure a line of credit with a savings or money market account. Securing a line of credit with collateral can help you qualify or get a lower rate.

Home equity lines of credit: A home equity line of credit is an example of a secured credit line, where your home is collateral for the borrowed funds. The lender can take your property if you fail to repay.

Business lines of credit: Business owners can use a line of credit for working capital or revolving expenses. Business lines of credit can be unsecured, but a secured line of credit could help you access more funds. Small businesses may use inventory or property as collateral on a secured business line of credit.

Compare personal lines of credit, credit cards and personal loans

Credit cards and personal loans are alternative ways to borrow. Here's how they compare with personal lines of credit:

Personal lines of credit

Credit cards

Personal loans

Approximate APR range

7%-26%.

16%-30%.

6%-36%.

Borrowing amount

Lender decides your credit limit.

Lender decides your credit limit.

$1,000-$100,000.

How you borrow

As needed.

As needed.

Lump sum.

Repayment terms

Varies by lender.

Continuous.

2 to 7 years.

Monthly payment

Variable.

Variable.

Fixed.

Annual fees

Some.

Some.

None.

Type of credit

Revolving.

Revolving.

Installment.

Personal lines of credit

Personal lines of credit are most commonly offered by credit unions and small banks, though some large banks offer them. Credit lines can have rates from 7% to 26%. A line of credit may also have an annual fee, which you generally have to pay regardless of whether you use the available funds.

Many lenders offer an online application, but small financial institutions may require a phone call to get started. You may be required to open a checking account at a bank or become a member of a credit union to apply for a line of credit.

When they work best: A line of credit can make money readily available for unexpected expenses. And personal lines of credit also work for ongoing projects with variable costs and timelines, like home or business renovations.

Credit cards

Credit cards are usually issued by banks or credit unions. Typical credit card APRs range from 16% to 30%. You can usually apply for a credit card online and receive the card within seven to 10 business days after approval.

When they work best: Credit cards are intended for everyday use. You can swipe them to get gas or groceries or use them to buy furniture or cover a car repair. It’s a best practice to keep your credit utilization at or below 30%, so credit cards aren’t ideal for expenses that exceed that threshold.

Personal loans

Personal loans can come from a bank, a credit union or an online lender. These loans are often unsecured and have rates from 6% to 36%.

You can often pre-qualify for a personal loan online to preview potential rates and loan amounts. Many lenders make approval decisions within a day or two and send your funds in a lump sum within a few days after approval. Repayments toward your loan typically begin within 30 days.

When they work best: A personal loan is an option for large, one-time expenses like a home repair or consolidating high-interest debts.

How a line of credit affects your credit score

Applying for a personal line of credit requires a hard credit check, which will cause your credit score to dip. This is usually a temporary drop of a few points.

Beyond that, the impact to your credit score depends primarily on repayments. On-time payments toward revolving credit lines can build your credit, but missed payments will damage your score, so borrow only if you have a plan to pay it back.

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
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