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If you need to borrow money repeatedly over an extended period of time, a personal line of credit (PLOC) gives you access to funds that you can tap into whenever you want.
This method of borrowing can be useful if you’re financing multiple expenses, like for a home renovation or wedding, and you can’t estimate all the total costs upfront.
Here’s what you need to know about borrowing with a personal line of credit.
What is a personal line of credit (PLOC)?
A personal line of credit is a type of revolving credit that functions like a mix between a credit card and a personal loan. A lender approves you for a specific credit limit, then you draw only what you need and pay interest only on the amount you use.
As you make payments on your balance, you free up your credit line to borrow more.
A personal line of credit is different from an installment loan, which gives you a lump sum of money that you repay in installments over a fixed term.
Credit limit: Credit limits typically range from several hundred dollars to $50,000.
Qualifying: Lenders use information about you, such as your credit, income and outstanding debts, to decide whether you qualify. This information can also affect your credit limit and annual percentage rate. Borrowers with good or excellent credit (scores in the mid-600s or higher) have the best chances of getting approved for low interest rates.
Rates: Personal credit lines have variable interest rates, meaning your rate (and monthly payment) could change in the future. You only pay interest on what you borrow rather than the full credit limit amount.
Rates can be lower than credit cards but are often higher than personal loans. For example, PLOC rates start around 10.75% at U.S. Bank and Regions Bank. Personal loan rates, on the other hand, can be as low as 7%. Credit cards may have APRs starting around 15% or higher.
Fees: Some lines of credit come with transaction fees when you access funds. For example, U.S. Bank charges a 4% fee ($10 minimum) for drawing from a credit line via an ATM. Some lenders charge an annual or monthly maintenance fee. Regions Bank, for instance, has a $50 annual fee on its Regions Preferred Line of Credit.
Secured or unsecured: Personal lines of credit are commonly unsecured. This means you don’t need to pledge collateral in order to get approved. Some lenders may allow you to secure a line of credit with a savings or investment account. You may have a better chance of approval, a lower rate or a higher credit limit if you secure a line of credit with collateral, especially if you have bad credit or a low income.
Where to get a PLOC: Personal lines of credit are offered by banks and credit unions.
Uses: You can use a PLOC for many purposes, including to finance a home renovation, pay for a wedding, cover emergency expenses or consolidate debt.
How does a personal line of credit work?
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. The draw period can last up to five years.
During this time, you may be responsible for minimum monthly payments or interest-only payments, depending on the lender. Paying more than the minimum means you'll pay less in interest over time.
Repayment period: After the draw period, the credit line goes into repayment, which could last up to 10 years. During the repayment period, you can no longer withdraw money, and you make principal and interest payments for the rest of the term.
Example of using a personal line of credit
Say you use a PLOC to finance upgrades to your new home. You get approved for a $20,000 personal line of credit with a two-year draw period and a five-year repayment period. If you initially use $8,000 to install new flooring in your house, you’d have $12,000 available on your PLOC.
Let’s say you pay down $5,000 of your $8,000 balance in the first year, leaving you with a balance of $3,000. That $5,000 you repaid would bump your available credit limit up to $17,000.
Perhaps before the draw period is over, you tap into your credit line again for $15,000 to replace your HVAC system. Once the two-year drawal period ends, you aren’t able to borrow any additional funds.
Over the following five years of the repayment period, you’ll continue making payments on your debt until the balance is paid off. Since your rate is variable, your minimum monthly payment amount will change throughout this time.
When to use a personal line of credit
A personal line of credit can be a helpful resource when you’re not sure how much you need to borrow. You might consider taking out a personal line of credit if:
- You are financing an expense with unpredictable costs and timelines, like a cross-country move.
- You have irregular income or expenses and want to smooth out your cash flow.
- You want to create a financial lifeline to handle emergencies or unexpected expenses.
How to get a personal line of credit
Find a lender: You may be more likely to find a personal line of credit at smaller banks and credit unions. The lender might require you to be an existing customer.
Apply: You may be able to apply online, in person or over the phone, and the process is similar to applying for a personal loan or credit card. You’ll provide the lender with your personal and financial information, such as your Social Security number and annual income. The lender will assess your creditworthiness, income and existing debts to determine whether you qualify and at what rate.
Access the money: If approved, you may access funds in a few different ways, depending on your lender. This could include checks, debit cards or transfers to your checking account.
How a personal line of credit affects your credit score
When you apply: Applying for a personal line of credit requires a hard credit check, which can cause your credit score to go down a few points.
Using the funds: Using too much of your credit limit will raise your credit utilization ratio, which is what you owe compared to your available credit. A high credit utilization ratio can negatively affect your credit score. Conversely, you could reduce your overall credit utilization and improve your credit score if you open a personal line of credit and keep the balance low. NerdWallet recommends using no more than 30% of your PLOC’s credit limit at once.
Making payments: Reputable lenders report payment history to the major credit bureaus. On-time payments toward revolving credit lines can build your credit, but missed payments will damage your score.
Pros and cons of a personal line of credit
Pros
Flexible access to funds.
Can be used for almost anything.
Only pay interest on what you use.
Replenishing credit limit.
No collateral needed.
Cons
Usually requires good credit.
Interest rates and monthly payments aren’t fixed.
May have transaction or account maintenance fees.
Credit score can be negatively affected by missed payments or a high credit utilization.
Other types of lines of credit
Other credit lines besides personal lines of credit include home equity lines of credit and business lines of credit.
Home equity lines of credit: A home equity line of credit, or HELOC, 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 or secured, using inventory or property as collateral.
Comparing personal lines of credit to other financing options
Personal loans and credit cards share similarities with PLOCs. Compare the three options to be sure you’re making the right borrowing choice. These are some of the main differences:
- PLOCs vs. personal loans: Personal loans provide a lump sum of money, whereas personal lines of credit give you access to funds that you can borrow as needed. You’ll repay a personal loan in fixed monthly installments, while PLOC payments will vary based on your outstanding balance and current interest rates.
- PLOCs vs. credit cards: Credit cards and personal lines of credit are both types of revolving credit that let you borrow money and repay funds as often as you want, up to your credit limits. Credit cards usually provide easier access to funds but can have higher interest rates than PLOCs. You can charge a credit card as long as your account remains open, but you’ll only be able to charge a PLOC during the draw period.
| Personal lines of credit | Credit cards | Personal loans | |
|---|---|---|---|
| Borrowing amount | Typically up to $50,000. | 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. |
» MORE: The best ways to borrow
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