Pros and Cons of a Personal Line of Credit

A personal line of credit offers funds that you can use for a variety of purposes, including home renovations, emergency repairs, and other expenses.

Similar to a credit card, a personal line of credit is a revolving form of credit that you can draw on as needed. However, you only have access to it for a specific period of time, so you may need to reapply if you want to keep your credit line open longer.

Here’s a closer look at how a personal line of credit works, including pros and cons, and how to apply.

What is a personal line of credit?

A personal line of credit is a form of revolving credit that you can borrow from as needed and use as you see fit. You can find personal lines of credit from some banks and credit unions, as well as online lenders. Like applying for a credit card, the application and approval process can be completed within minutes.

Personal lines of credit are generally unsecured and typically have variable interest rates that fluctuate with market conditions. You’ll only pay interest on the amount you borrow, but you might have to pay fees to keep your line of credit open or withdraw money.

Tip

An unsecured line of credit is one that doesn’t require collateral, like your home or car. A home equity line of credit (HELOC) is an example of a secured line of credit.

While specific credit requirements for a personal line of credit vary by lender, you need at least a good credit score of 670 or higher to access the best interest rates.

How does a personal line of credit work?

A personal line of credit lets you borrow money up to a maximum amount.

Many personal lines of credit have a continuous draw period, which means you can continue to draw from your line of credit as long as you make minimum payments and have available credit.

Some credit lines, however, such as HELOCs, work in two phases, a draw period and a repayment period.

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Draw period

This is the period of time during which you can borrow money from your line of credit. Depending on the bank, you may be able to access your credit line via an access card (like a debit or credit card), checks, transfers to your checking account, ATMs, a mobile app, or by visiting a branch.

You may also be able to use a credit line to protect against overdrafting your checking account.

During your draw period, you usually have to make minimum payments or pay off interest charges on a monthly basis. Unlike using a credit card, interest may be due immediately once you take an advance (most credit cards have a grace period of one billing cycle, where interest isn’t charged on new purchases).

If you pay back the money you’ve borrowed, it becomes available to withdraw again.

Note

Some lenders charge an annual fee to keep your line of credit open.

Repayment period

If your credit line does not have a continuous draw period, it may have a repayment period. If your draw period ends, you can no longer borrow from your personal line of credit.

Instead, you’ll make payments on the amount you borrowed, plus interest charges, for the rest of the repayment term.

Personal loans vs. personal lines of credit

Both personal loans and personal lines of credit provide funding for personal expenses. They’re also typically unsecured, meaning you don’t have to put up collateral. Both often have minimum requirements for credit and income as well.

However, personal loans offer a lump sum of funding upfront that you’ll pay back over one or several years. And they usually have fixed interest rates, so you’ll have predictable monthly payments and long-term costs.

By contrast, a personal line of credit lets you withdraw money on an ongoing basis during your draw period and only pay interest on what you use. Unlike personal loans, personal lines of credit typically have variable interest rates, so it can be tough to predict your borrowing costs.

Pros and cons of a personal line of credit

There are both advantages and potential disadvantages to personal lines of credit that are worth considering before you apply.

Pros

Access financing as you need it: A personal line of credit lets you withdraw money if and when you need it, so you don’t have to request a specific amount upfront. It may be preferable to a personal loan if you have variable expenses or need to cover occasional gaps in cash flow.
May have better rates than credit cards: Depending on your credit, you could qualify for a lower interest rate on a personal line of credit than you would on a credit card.
Collateral not required: Personal lines of credit are often unsecured, so you don’t have to pledge any of your assets to borrow money.
Can protect you from overdraft and NSF fees: Banks and credit unions often let you link a personal line of credit to your checking account. If your account would be overdrawn, the line of credit is charged for any insufficient funds in your account.
May get funds quicker than a personal loan: If you bank with an institution that offers a personal line of credit, you may be able to qualify for one and have access to the money the same day. While there are some same-day personal loans, many take 1 to 3 business days to fund.

Cons

May come with various fees: Depending on the lender, you might have to pay an origination fee, withdrawal fees, annual maintenance fees, late payment fees, or other costs.
Variable rates mean unpredictable costs: Since the interest rate can change on a variable loan, it’s not possible to calculate your long-term borrowing costs from the get-go.
May be tough to qualify: It can be challenging to get approved for a personal line of credit if you have weak credit or a limited credit history.
Interest may start accruing immediately: When you use a credit card to make purchases, you usually have a grace period of one billing cycle until interest starts accruing on new charges. A personal line of credit may not have a grace period, which could mean more expensive borrowing — especially if you pay off your credit card balance each month.
Can’t prequalify: Many lenders let you prequalify or get preapproved for both personal loans and credit cards. This means you can get a sense of your eligibility without impacting your credit score. The personal lines of credit we reviewed, however, don’t. They all require a full application with a hard credit inquiry to gauge eligibility.

How to get a personal line of credit

Not every bank or credit union offers personal lines of credit. Start with yours to see if one is available.

If so, review the eligibility requirements before applying. Do you meet them?

If you do, getting a line of credit with your bank may be the easiest route — the alternative could mean opening a new account elsewhere.

But it’s still worth comparing multiple lines of credit to be sure.

When applying for any loan, it’s generally best to:

Check your credit: Your credit score plays a big role in whether or not you get approved for a personal line of credit, as well as the rates and terms you can get. Check your credit score before you apply.
Research banks and credit unions: You’re frequently required to have or open a checking account with the institution you choose in order to get a personal line of credit. But it may be worth it if you can find one with a fixed interest rate, for example, or a low APR.
Apply: Since you generally can’t prequalify, you may want to submit multiple applications to see where you can get the best rate and terms. Be careful not to spread these applications out over too wide a time range. Submitting multiple applications for credit can negatively impact your score. But the bureaus recognize that, in some cases, you may just be shopping rates. Try to limit applications to a 14-day window to be on the safe side. That said, with any loan application, your score is likely to dip temporarily.
Open your personal line of credit: If your application is approved, you can choose to move forward. The lender might give you checks or a card to access your funds, or it may be possible to request transfers into your checking account online or over the phone.

Tip

Compare annual percentage rates (APRs) between personal lines of credit to see which is the lowest cost. The APR considers both the interest rate and any upfront fees, which can increase your costs to borrow.

Compare: APR vs. Interest Rate on a Personal Loan

Personal line of credit for bad credit

You often need good credit to qualify for a personal line of credit, so finding options for bad credit can be challenging. However, each lender sets its own borrowing requirements, so it’s worth shopping around to find lenders with more lenient criteria.

Some lenders also offer secured lines of credit, which may be easier to qualify for. A secured line of credit requires collateral, such as a savings account, vehicle, or other valuable asset. Keep in mind, though, that the bank can seize your asset if you don’t pay back your line of credit.

If bad credit is blocking you from approval, take steps to improve your credit before you apply. Some of these steps could include making on-time payments on your loans, reducing your credit utilization, and disputing any errors you find on your credit report.

FAQ

Which banks offer personal lines of credit?

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Some banks with personal lines of credit include U.S. Bank, TD Bank, and PNC Bank.

Some major banks don’t offer them, but you can find personal lines of credit at various smaller banks, credit unions, and online lenders.

How can I use a personal line of credit?

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You can use a personal line of credit for a variety of expenses, including home renovations, emergency repairs, medical bills, or seasonal cash flow issues.

If your line of credit has a continuous draw period, you can continue to use it as long as you make minimum payments and have credit available.

If it has a repayment period, the draw period ends, and you’ll pay off the amount borrowed during that time.

How will a personal line of credit affect my credit score?

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A personal line of credit can affect your credit score in a few ways. When you first apply, the lender may run a hard credit inquiry, which can decrease your score by a few points, temporarily.

Making on-time payments on your line of credit can improve your score, while missing payments will damage it.

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Meet the expert:

Rebecca Safier

Rebecca Safier has more than eight years of experience in personal finance. Her work has been featured by CNN, U.S. News & World Report, New York Post, and Buy Side WSJ.