Personal Line of Credit

Personal line of credit summary:

• A personal line of credit works like a credit card. You can borrow money, repay it, and borrow it again.

• Personal lines of credit often have a variable interest rate. In contrast, personal loans typically have a fixed interest rate.

• Personal lines of credit are usually unsecured, which means you qualify based on your creditworthiness.

Personal line of credit definition and meaning

A personal line of credit (PLOC) is similar to a credit card. You can borrow as much as you want, up to a preset limit. You can draw funds as needed. As you make payments, you free up available credit and can borrow more.  

You can draw from a personal line of credit more than once, so it’s a type of revolving debt. You pay interest only on the amount you borrow, not the entire preset limit. For example, if your credit limit is $20,000 and you borrow $5,000 to repair your garage, you only pay interest on the $5,000 you owe.

Key concept: A personal line of credit allows you to borrow up to a preset credit limit. Once you've repaid those funds, you're free to borrow the money again.

More about personal line of credit

Because you can borrow from and repay the line of credit as often as you'd like, a personal line of credit is one of the most flexible kinds of credit accounts available. PLOCs are most often offered by smaller banks and credit unions. 

When you apply for a personal line of credit, the lender typically reviews your credit history and income. They could also look at your debt-to-income (DTI) ratio, employment history, and loan purpose. 

Personal line of credit: key features

Here’s a closer look at what you should know about PLOCs.

Purpose

A personal line of credit could be used for various purposes, such as:

• Home improvements 

• Medical bills 

• Debt consolidation 

• Overdraft protection

• As a buffer against unexpected expenses while you’re still building your emergency fund

The most attractive feature of a personal line of credit may be that you don't have to borrow your full credit limit all at once if you don’t want to. Instead, you could borrow it as needed. For example, if you've decided to improve your home and landscaping but don't want to rush into decisions, you can take your time. A PLOC could be a good option if you’re not sure how much money you’ll need, or if you know you won’t need it all at once. 

Interest rates

Personal lines of credit usually have a variable interest rate. That means the rate could go up or down from time to time. Generally speaking, PLOC interest rates tend to be about the same or a little higher than personal loan rates, and lower than credit card rates.

Requirements

You don’t have to own anything of value that you could borrow against to apply for a PLOC. Because a personal line of credit is unsecured, no collateral is required.

Fees

Depending on the lender, you may need to pay an origination fee, annual fee, and/or transaction fees. You might also pay a transaction fee each time you access funds.