What Is a Personal Line of Credit?
A personal line of credit is a loan that closely resembles a credit card. You have a specific amount of money that you can use for any purpose, as needed. A personal line of credit often comes with lower interest rates than credit cards, making them a much better choice for borrowing.
The advantage of a personal line of credit is it does not have to be used for a specific purchase and no interest is charged on the unused amount. Personal lines of credit are unsecured, which means you don’t need to offer collateral to protect the lender if you default. This allows you to borrow in increments, repay it and borrow again, as long as the line of credit remains open.
As with all cases of borrowing, make sure you have a strategy for repaying the money with interest before you take a loan. Typically, you will be required to pay interest on borrowed balance while the line is open for borrowing, which makes it different from a conventional loan, which is repaid in fixed installments.
How Can a Personal Line of Credit be Used?
A personal line of credit is often used for home remodeling projects, but could help pay for a vacation, medical bills, buying new furniture or help a child pay for college. You can spend the money for whatever you want, in whatever small or large sums you wish, as long as you don’t exceed the approved line of credit.
A secured credit line is one in which the borrower uses an asset, usually a car or home, as collateral to secure the loan. The lender can seize the asset if the borrower doesn’t repay the debt according to the terms. Creditors usually offer lower interest rates, higher spending limits and better terms on secured lines of credit.
HELOCs use equity in real estate as collateral and are really second mortgages attached to credit lines. Lenders will want to appraise your home, check your credit score and income and ask about your other investments and debts. The amount of equity you have in your home – essentially the dwelling’s value minus what you owe on it – will limit the size of your credit line.
Unsecured lines of credit require no collateral. A creditor is accepting the borrower’s word that he will repay the debt. It usually is difficult to get an unsecured LOC approved unless you are a well-established business or an individual with an excellent credit rating.
How to Get a Personal Line of Credit
Lenders will evaluate your creditworthiness based on your credit score, your loan repayment history, any business risks you might have and your income and will limit how large a line they offer.
The larger your credit line, the greater risk you pose to the lender. You should request only what you realistically might need to borrow, keeping in mind your income stream and ability to repay the borrowed money.
Another problem is that the interest rates are variable, making them subject to the whims of the marketplace. They can change from year-to-year, depending on the terms of the loan agreement.
Also, be aware that a line of credit can hurt or help your credit score, depending on how you use it. If you draw a high percentage of the amount borrowed – taking $9,000 of the $10,000 you borrowed, for example – it will hurt your credit score. Likewise, take less than 30% of your draw is considered good use and improves your credit score.
You will pay interest only on the amount you borrow and as long as you make a minimum monthly payment you can pay back as much or as little as you want every month until the end of loan period, when the entire principal amount is due.
A personal line of credit has many similarities to credit cards, personal loans, a home equity line of credit (HELOC) and payday loans, but enough differences to make it a distinctive form of borrowing worth investigating when you need money quickly.
There are many differences between a line of credit and personal term loans, the primary one being that money is disbursed on a draw as needed in a LOC while money in a personal loan is disbursed all at once. The interest rate on a LOC is variable and you only pay it on the portion of funds you use. A personal loan carries a fixed interest rate and monthly payments are made on the balance owed.
A personal line of credit offers easily accessible cash, longer terms and typically low interest rates. Apply today to gain access to the financing you need.
