What Is a Personal Line of Credit? 

You may be familiar with personal loans and credit cards. But do you know that there’s another potential source of financing called a personal line of credit?

No, this does not involve a plastic card. But it is also a kind of loan that banks and credit unions offer to those who qualify for it and that you can pay back based on the terms agreed upon.

It’s essentially a line credit that you are free to tap each time you need cash, whether it be to consolidate debt, pay for bills or cover unexpected expenses.

Generally, as long as you have a good credit score and have some money saved up, you can apply for one. The specific eligibility requirements, however, may differ from lender to lender.

Credit line terms

Lenders also set their own terms for personal lines of credit, so it’s important to understand the basics.

Interest rates: Personal lines of credit are available with fixed or variable interest rates. Rates usually range from 8 to 20 percent or higher.

Costs: Be on the lookout for or ask about all possible fees. Some lenders charge application fees, and there are a few that ask borrowers to pay cash advance fees. Personal credit lines also usually come with annual fees, although banks might waive this if you have an open account.

Credit limit: This can fall anywhere between a couple thousand dollars to more than $1 million.

Unsecured or secured?

When it comes to personal lines of credit, the terms unsecured and secured pertain to whether or not collateral is required.

Financial institutions see collateral as a way to lower the risk of letting you borrow money. Collateral is not a requirement in unsecured personal lines of credit, but it is needed for a secured personal line of credit. In this case, the lender might also verify other assets by checking the balance of your savings or investment account or asking for a certificate deposit.

When you opt for a secured personal line of credit and are unable to pay off your debt, you won’t get back your collateral. Also, you might not be granted access to your collateral until you have repaid what you owe.

Applying and using your credit line

When you apply for a personal line of credit, one of the first things you need to do is gather and submit all kinds of financial documentation such as W-2s, pay stubs and tax documents. The lender will also look into your credit history, credit score and debt-to-income ratio.

If you qualify and after your application is approved, you will be presented with the terms of the agreement, which you need to carefully review before signing.

Within a few days of signing the terms of agreement, you will be able to access your personal line of credit and use this to obtain an advance, transfer cash or write a credit check.

If the agreement includes a draw period, this means you can draw up to the set credit limit for the prescribed number of years, after which you will need to start repaying. There may also be a minimum monthly payment that you need to meet.

A personal line of credit is a viable and reliable option if you’re looking to borrow money. As with personal loans and credit cards, it has its pros and cons. But if it suits your financial needs and goals, then you should definitely give it a try. 

Just be careful of online scammers that will pose as reputable online lenders. You need to recognize red flags when you see them so you don’t become a victim of an online lending scam. Do not work with lenders that require upfront payments, or those that have offers that are too good to be true. 

You need money but you don’t want to get involved in a scam that will not only stress you out but will also put you in bigger trouble.