Everyone is a little short of cash sometimes. Maybe you need to make a large purchase. You might also need to cover unforeseen expenses from an accident or health issue. Or maybe you don’t have any pressing needs right now, but you want to know that you have the resources to handle anything that comes up.
That’s where a personal line of credit comes in. A personal line of credit can help you cover unforeseen expenses, large and small.
This article will tell you everything you need to know about personal lines of credit. We’ll explain what they are. We’ll also go over some of the different types of personal lines of credit. Finally, we’ll compare a personal line of credit to a loan and tell you how to get the best rates on a personal line of credit.
What is a Personal Line of Credit?
A personal line of credit is a financial product. It’s half credit card and half personal loan. That gives people the flexibility they need. You can use your personal line of credit to pay for anything.
A personal line of credit woks by giving you a set amount of money you can draw on. It’s different from personal loans and credit cards. A line of credit can be structured in different ways. For example, some banks give a personal line of credit with a draw period. That means you have a set amount of time to spend money out of the line of credit. Payments don’t start until the draw time has ended.
Other companies have personal lines of credit that work like a credit card. You make a minimum payment on the balance each month until it’s gone. For these types of lines of credit, you start paying a monthly payment right away.
Secured Personal Credit vs Unsecured Personal Credit
There are two primary types of personal credit. Secured personal credit and unsecured personal credit. For consumers, an unsecured line of credit is the best choice.
The difference between them is whether or not you have collateral to cover your line of credit. An unsecured line of credit doesn’t require any collateral. A secured line of credit requires some kind of collateral to hold in security against the credit.
That means if you’re offered a secured line of credit, you’ll have to put up some kind of asset as collateral. That asset could be anything. Banks will accept vehicles, homes, jewelry, bonds, stocks, and other property.
An unsecured line of credit means you don’t have to put up any collateral. Instead, you’re offered the line of credit. The bank trusts that you’ll pay it back.
Unsecured lines of credit usually have slightly higher interest rates than secured lines of credit. That’s because the credit doesn’t have any collateral to secure it. As a result, the lender is taking more risk. That means they need to make more money to justify the risk. This results in a higher interest rate.
We’ll talk more about credit scores and personal lines of credit in a later section. Right now, you just need to know that it’s hard to get an unsecured line of credit without an excellent credit score.
How do I get a Personal Line of Credit?
You get a personal line of credit the same way you’d get a loan or other financial product. You find a lender and apply for a line of credit. The lender will make a decision based on your credit score and other factors. Once they’ve reviewed the application and made a decision, they’ll let you know what kind of deals they can offer you.
You need a good credit score to get a personal line of credit. Most banks only offer them to “prime” borrowers. That usually means a credit score of 680 or higher. However, every situation is different. That’s why it’s best to shop around and see what kind of offers you can get if you’re looking for a personal line of credit.
If you want to increase the chances that you’ll be approved, you need to be aware of your credit score. That means monitoring it closely to ensure it’s high enough to get a line of credit. If your score is too low, then you might attempt credit repair to improve it.
What are the Benefits of a Personal Line of Credit?
A personal line of credit’s primary benefit is flexibility. You can use the line of credit like a loan. However, you only make payments on what you spend. That’s different from a loan. When you take out a loan, you’re given the full amount all at once. You then need to pay back that full amount.
The flexibility offered by a personal line of credit makes it extremely useful for many different kinds of people.
For example, if you work as a consultant or freelance, you can use a personal line of credit to cover your bills when you’re in between projects or waiting to be paid. Then, when you get paid, you can pay off the credit you used.
Personal lines of credit are also helpful for people who have a large expense coming up, but don’t know the exact cost. One example of this is home renovation. You might plan a budget for your home renovations, but you won’t know the final cost until everything’s done.
You can also use a personal line of credit as a source of emergency funds. That way you’ll have the money on hand you need to cover life’s various obstacles.
Line of Credit vs Personal Loan
Lines of credit and personal loans are very similar products. However, there are some important differences. The biggest difference is how disbursement and repayment work.
When you take out a loan, you receive the full amount all at once. That means you’ll start making payments right away. Also, you can’t change the amount of your loan. If you need more money, then you have to apply for another loan. If the loan is too big, you still have to make payments on the full balance.
This is a huge difference for many people. If you’re facing medical bills, you don’t want to have to go through the trouble of applying for a new loan should you exhaust your funds. You also don’t want to take out a loan that’s bigger than you need.
Some people think that taking out a larger-than-needed loan isn’t a big deal. However, this loan shows up on your credit report. It also affects your debt to income ratio. Moreover, some loans have a penalty for early repayment. That means you can’t just give the money back to the lender without incurring steep fees.
However, there are situations where you want a personal loan instead of a line of credit. These situations include any time you know how much you’ll be spending. Taking out a line of credit when you know you’re going to spend a fixed amount maxes your credit utilization. That hurts your credit score. As a result, future loans and financial products will be more expensive for you.
Another difference is the collateral. Some banks are more willing to offer an unsecured personal loan than they are an unsecured line of credit. That’s because the flexibility of a line of credit makes it harder for the bank to balance the books on their end.
Finally, a personal loan is a better option if you’ve had problems with spending discipline in the past. There’s no limit on what you can use your line of credit for. That means you might start treating it as free money. That’s especially true if you don’t have to make payments until after the draw period. If you don’t have the financial discipline to avoid impulsive spending, then a personal loan is a better option for you.
Alternatives to Personal Lines of Credit
There are some options if you need a line of credit but can’t or don’t want to qualify for a personal line of credit. One of the most common options is a HELOC, or home equity line of credit.
This type of product is secured by the equity in your home. Essentially, you’re re-mortgaging your home. However, instead of getting the all the money up front, it comes in the form of a credit line. Many people use this option to make home renovations or improvements. It gives them the spending flexibility they need without incurring the higher interest rates you’d get from an unsecured line of credit.
Getting the Best Personal Line of Credit Rates
Now that you understand personal lines of credit, it’s time to cover some ways to make sure you get the best rates. The better your interest rates, the cheaper it is for you to use your line of credit. A difference of even a few points can add up to tens of thousands of dollars over the course of your credit line.
Get a Line of Personal Credit Before You Need It
If you want to get a personal line of credit, then there are a few things you should do to get the best rates. Good rates on a personal line of credit are reserved for people with the highest credit scores. Therefore, you want to make sure you’re getting your line of credit when your finances are at their healthiest.
For example, many people look to a personal line of credit to cover unforeseen medical expenses. However, if the medical expenses are already building, then your income, savings, and credit score have probably taken a hit.
That means that the best time to get a personal line of credit is before you need it. Some personal lines of credit have an annual fee, whether you’re using them or not. However, this fee is much lower than the repayments you’d be making on a loan. It’s also usually worth the peace of mind knowing that you’re covered in case the worst happens.
Stay on Top of Your Credit Score
The next step to getting the best rates on a personal line of credit is to stay on top of your credit score. That means constantly checking to ensure there’s no negative or harmful information on your credit report.
Also, you need to demonstrate that you use credit responsibly. It’s best if you can show that you’re not carrying any balances from month to month. That means your credit utilization is low. As a result, lenders and banks can tell you’re not a high-risk investment.
Check with Your Current Bank
Finally, the first place to look for a line of credit should always be your current bank. Many banks offer discounts and preferential rates if you get a line of credit from them and also use them for your checking, savings, or stock accounts. For example, Well’s Fargo recently offered a 1 point discount on lines of credit if you already used them for your checking account.
That doesn’t mean you shouldn’t shop around. Sometimes banks and lenders will compete for your business. If that’s happening, then you stand to gain. This competition lowers the price of products for you, making a personal line of credit even cheaper.
As you can see, a personal line of credit is a useful and important financial product. It offers the flexibility of a credit card without the high interest rates. It also offers the access to resources you’d get from a loan, without locking you in to a set amount.
No matter why you need a personal line of credit, make sure you’re getting the best deal. You can use different personal line of credit calculators to price different companies. You can also use our site and other tools to shop around for the best offer. After all, the more you pay for financial products, the less value you actually get out of them.
If you need access to cash, but don’t want to take out a loan or credit card, a personal line of credit may be the answer you’re looking for. Shop around and see what your options are. Use your personal line of credit to have the money you need when you need it.