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.

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Introduction

Personal Line of Credit

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.

 

FAQ

The Basics

A personal line of credit is a great option to consider when it comes to borrowing money. Many people overlook this option, but it has many advantages when compared to a traditional loan. Credit lines are similar to credit cards, but they have a much lower interest rate, and there is no penalty for withdrawing cash.

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What is a personal line of credit?

A personal line of credit is a set amount of money you may borrow against, but you can borrow as much or as little as you need. These lines of credit typically have variable interest rates, and your monthly payment will vary depending on how much or how little you borrow.

How does a personal line of credit work?

With a personal line of credit, you can be selective about how much of the credit you use (or borrow). Most personal lines of credit have variable interest rates, but they are still usually lower than a fixed rate. You then pay back the amount you borrow in installments.

What's easier to get - personal loan or line of credit?

A personal loan and a personal line of credit are virtually the same thing, with the same application processes and features. The only difference is, with a line of credit you can only use what you need, so you’re saving on interest and on over-borrowing. With a personal loan, you’ll receive a lump sum payment and then have to pay off that amount in installments.

How to use personal line of credit?

You use a personal line of credit similar to any other loan. The only caveat is, you can borrow the amount you need, and you only have the pay interest on the amount you use (not the amount of the credit line).

Is a personal line of credit a good idea?

It may depend on your personal financial situation. If you can get a variable interest rate that is reasonable, and lower than most fixed rates, then getting a personal line of credit is probably a good idea. It’s also better than a loan, because you can borrow only the amount you need.

How does a personal line of credit affect credit score?

In most cases, your credit score won’t be negatively affected by taking out a personal line of credit; although, if you already have a high debt-to-income ratio, it could bring your score down because you are increasing your debt amount. On the other hand, you’ll have a larger amount of credit available to you, so it may not have a significant impact on your credit score.

What is a personal line of credit loan?

A personal line of credit is like a personal loan, except you don’t get the money in one lump sum. You have access to a specified amount of cash, and you can borrow as much as you need (below the approved limit) at any time. You then repay what you borrowed in monthly installments at a variable interest rate.

What is needed for a personal line of credit?

In most cases, you’ll need proof of income, and at least an average credit score to be approved for a personal line of credit. If you are using the money for a certain purpose, like home remodeling, then that may increase the options you have for a line of credit.

What is a personal signature line of credit?

A personal signature line of credit is an unsecured credit line that is revolving – the line of credit will not expire, so you can continue to use it as long as you remain current on your monthly payments. A signature line of credit is typically reserved for those with excellent credit scores.

What is the difference between residential loan verses personal credit line?

The biggest difference between a residential loan and a personal line of credit is how you get your money. With a residential loan, you will get one large lump sum, so the monthly payments are based on that amount. A personal line of credit allows you to borrow just as much as you need, so you can reduce your monthly payment significantly.

Should I get a personal line of credit?

A personal line of credit is a great way to borrow the money you need, but not all at once. This allows you smaller monthly payments. Personal lines of credit also tend to have lower interest rates than a traditional loan, although the rates are usually variable; with a traditional loan, the rate is usually fixed.

How to Get a Personal Line of Credit

Getting approved for a personal line of credit is just as easy as applying for a personal loan. There’s a relatively quick and easy application process, and you’ll typically have an answer in less than 48 hours. Most financial organizations have online applications, so you don’t even need to leave your house.

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How to obtain personal line of credit?

To get a personal line of credit, you’ll want to check the interest rates at a couple different institutions so you can get the lowest rate available. Most banks and financial organizations have online applications, or you can go into a physical location if you prefer. All you’ll need is your basic personal information, a valid ID, and proof of income.

What is a personal line of credit from a bank?

A personal line of credit is a specific amount of cash allotted to you by a bank or other financial institution. You get approved up to a certain amount, and then you can borrow as much or as little as you need over time. You’ll repay the amount you borrow in monthly installments.

Where can I get a personal line of credit?

You can get a personal line of credit at any bank or financial institution. You can also check online for offers from peer to peer lending sites, and other electronic options. Be sure to check the interest rate and the terms of the credit line before you complete an application.

Does Bank of America offer personal lines of credit?

Yes, Bank of America offers personal loans and personal lines of credit. Many consumers prefer lines of credit, because they can use only what they need, which makes the monthly repayment installments more manageable. In addition, most lines of credit have lower interest rates than a traditional loan.

How to apply for a personal line of credit?

Applying for a personal line of credit is similar to applying for a personal loan. You’ll have to provide basic personal information, have a valid I.D., and may have to provide proof of income. They will check your credit score, and that will determine how much credit you get and at what interest rate.

How do I get a personal line of credit?

You may want to contact the bank or financial institution you already use for your savings and/or checking accounts, but you can find personal line of credit offers from almost any bank, and there are many to choose from online.

How to use personal line of credit at Wells Fargo?

Wells Fargo offers both traditional loans and personal lines of credit. You can apply on their website or go into a physical location to begin the application process. Before you begin, you should review their terms, interest rates, and qualifications to be approved.

How to qualify for a personal line of credit?

Each bank or financial organization has their own eligibility requirements for personal lines of credit. In most cases, you’ll need a credit score of at least 700. You’ll also need a debt-to-income ratio of around 30-40%. Some places offer lines of credit specifically for home improvements and other purchases, so you’ll want to check that out as well.

Does Ally bank have personal lines of credit?

Not currently. Ally bank does not offer personal lines of credit. They only offer loans for home and auto financing. Ally does have some options similar to a personal line of credit, but it’s more like a credit card, so the interest rate may by higher than one on a line of credit.

What credit score for Key Bank personal line of credit?

There is no specific credit score listed as a qualification for a personal line of credit at Key Bank; however, you’ll probably need to be in the 700 range to get a reasonable interest rate. It may also depend on your income, and the city and state you live in.

How to get approved for a personal line of credit?

You simply go through the relatively painless application, which you can do online or in a physical location. Most applicants will get a response in less than 48 hours, so you won’t have to wait long.

Who has the best rates for personal line of credit?

Finding the best rates may vary depending on your specific financial situation, and the state you live in. Many states now regulate lenders to prevent excessive interest rates and predatory lending. There probably won’t be much variability in your area when it comes to the interest rate on a personal line of credit.

Is it hard to get a personal line of credit?

The application process is easy, and as long as you meet the eligibility requirements like having a decent credit score and a low debt-to-income ratio, getting a personal line of credit is not hard at all.

Important Details

Borrowing money is always a little scary, so it’s good to have all the pertinent details up front. Even if you are applying online, you’ll have access to a financial advisor, and you should ask them any and all questions you may have. It’s best to know what you’re getting into, before you get into it.

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Does personal line of credit affect credit score?

Opening up any new account may affect your credit score; however, as long as your debt-to-income ratio is below about 50%, then getting a personal line of credit should not significantly impact your credit score. If you make your monthly payments on-time, then you shouldn’t be too concerned about a negative effect on your credit score.

Is a personal line of credit tax deductible?

No, a personal line of credit is not tax deductible. Personal loans or lines of credit are not considered tax deductible as a student loan or other non-secured loan may be. You cannot (legally) claim the interest paid on a personal line of credit on your taxes.

What is an unsecured personal line of credit?

An unsecured personal line of credit is one that is not secured with collateral, such as your house or your personal vehicle. Unsecured personal lines of credit will have higher interest rates than a secured credit line, because there is more risk for the lender.

How much personal line of credit can I get?

The amount of credit you will be approved for depends on your credit score, your income, and your debt-to-income ratio. The great think about a line of credit is, you can borrow just what you need, which makes it easier to manage the monthly installments for repayment.

Which is better line of credit or personal loan?

Although it may depend on your financial situation, a line of credit is better, because you can borrow only what you need, instead of receiving the money in one lump sum as with a personal loan. Lines of credit usually have variable interest rates that are lower than any fixed rate you may find with a loan.

How long can we keep personal line of credit open?

It could depend on the terms of your credit line. In most cases, you can extend your personal line of credit indefinitely, but you’ll want to contact your lender or ask them up front about their specific requirements.

Can you increase a personal line of credit?

Not very often. Most personal lines of credit have a maximum amount you can borrow, and increasing this amount is typically frowned upon, as it’s a sign you may not be managing your money very well. In any case, it’s best to check with the lender or institution, as they may work with you depending on your circumstances.

How many lines of credit should a person have?

It’s best to limit your lines of credit (and personal loans, for that matter) to one, and at the most, two. It’s a good idea to determine your budget, and how much money you need to borrow, before you begin the application process for a line of credit.

What is a good personal line of credit?

As long as you are using a reputable company or financial institution, there aren’t really any “bad” personal lines of credit; however, there are personal lines of credit that may not be good for you financially if they come with high (or higher than usual) interest rates.

Is a personal line of credit a marital asset?

It depends on the laws in the state you live in. Some states with community property rules may consider a personal line of credit as a marital asset if opened during the marriage.

Can you claim personal line of credit interest on taxes?

No. Paying interest on a personal line of credit is just like paying interest on a personal loan, and you can’t claim either on your taxes.

How to calculate personal line of credit payment?

You’ll have to read the terms of your credit line, but you will have a set term to repay the money borrowed. Take the amount you owe, and divide it by the repayment term, and you’ll have an estimate. Don’t forget, you’ll then have to multiply your balance by the interest rate.  You will receive all this information when you are approved for the loan.

How does a CIBC personal line of credit work?

The CIBC (Canadian Imperial Bank of Commerce) has many options for personal lines of credit. You’ll get approved for a certain credit line, and you can borrow against that credit any amount you’d like. This allows you to only borrow the money you need, instead of getting one large lump sum.

Can you refinance a personal line of credit?

Probably not. Some lines of credit are revolving, so you will always have access to the remaining balance if you need to borrow from it again. You would most likely need to apply for a second line of credit, but you want to be careful, so you don’t get over-extended financially.

Where do credit lines fall on personal financial statements?

A personal line of credit would be a liability, or debt, on a personal financial statement. It would be the same as a traditional personal loan when it comes to assets and/or liabilities on a financial statement.

Does overdraft line of credit cover personal checks?

Yes. Unless your bank has a caveat about personal checks, an overdraft line of credit will cover any transaction (whether check or electronic) that causes your account balance to be negative.  Overdraft protection is very important to have to avoid additional fees if your account is overdrawn.

How to calculate interest on a personal line of credit?

To get an estimate, you’d divide the annual interest rate by 365 and multiply that number by the number of days in the billing period. There are calculators available online, but it’s best to do the calculations with a financial advisor.

Does opening a personal credit line hurt your credit score?

Opening a personal line of credit may slightly affect your credit score because it will reflect a new account being opened; but it may actually improve your credit score, because the amount of credit you have available to you will increase.

How to close a personal line of credit?

Once you have your line of credit payed off, and you’re confident you won’t need it anymore, then you can contact the lender and request to close the account. Keep in mind that closing the account my impact your credit score, because you will have a lower “available credit” ratio.

How does personal line of credit payment work?

Once you borrow against your line of credit, you’ll being repaying that amount in monthly installments. If you need to borrow more, your repayment amount will be adjusted based on the most recent credit balance.

Do personal lines of credit interest rates fixed?

No. Most personal lines of credit have variable interest rates. The term “variable” tends to frighten consumers, but rest assured the variable interest rate on a personal line of credit is lower than a fixed interest rate (in most cases).

How does interest work on a personal line of credit?

Personal lines of credit typically have a variable interest rate, so it will fluctuate over time depending on the market. While this may sound unreliable, most variable interest rates on lines of credit are lower than any fixed rate on a personal loan. The interest rate may also be higher if you have a low credit score.

When is a personal line of credit not recommended?

If you can’t get a personal line of credit at a decent interest rate (say, less than 15%), then it may not be a good idea to go through with opening the account. You don’t want to end up paying twice the original amount you borrowed.

Christine has a solid background in personal finance as she spent the last eight years working at one of the biggest banks in the US. She managed her own team of financial advisors that helped hundreds of people with their financing needs. Her innate understanding of different financial products and loans helped her move up the ranks quickly after graduating with a degree in Business Administration.