What is a Personal Line of Credit? Pros and Cons

What is a Personal Line of Credit? Pros and Cons

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An unsecured personal line of credit is a revolving credit account which allows you to draw funds up to a limit. It’s similar to a personal credit card because it allows you to borrow funds as needed, without having to take the full amount in one lump-sum payment. They’re useful for long-term projects with variable costs or for borrowers with irregular income streams.

How Does a Personal Line of Credit Work?

Personal lines of credit are open-ended loans which allow the borrower to withdraw funds as needed for a set period of time. The funds can be accessed through bank transfers or line-of-credit checks, and the borrower is allotted a credit limit for the term of the loan, which cannot be exceeded. Personal lines of credit can be issued for limits ranging from $1,000 to over $100,000.

During the loan, interest begins accruing immediately once funds are withdrawn; interest is only charged on the outstanding balance until it’s paid off during a preset repayment schedule. Borrowers usually make minimum monthly payments, similar to a credit card. The minimum repayment amount varies, but can be charged as a fixed fee, or percentage of the balance owed, usually 1% or $25—whichever is higher.

Personal lines of credit are usually unsecured loans, which means that there’s no collateral underlying the loan; the lender has no recourse if the borrower defaults. Lenders will sometimes allow borrowers to deposit collateral to secure more favorable terms, typically a lower interest rate. Annual or monthly maintenance fees are charged to establish a personal line of credit. Surcharges are also charged for late and returned payments.

Personal lines of credit generally permit you to use the funds as you want, so long as the amount spent falls under the credit limit. There are also home equity lines of credit and business lines of credit available. These loans function similarly to personal lines of credit but have collateral underlying the loan—home-equity—or are limited to certain expenses—business-related transactions.

Personal Line of Credit Repayment Structures

Due to the variety of repayment structures in the market, borrowers should be wary of the unique terms associated with their loan. The majority of personal lines of credit will function like a credit card, as outlined above. However, other repayment terms exist, and may have cumbersome provisions associated with them. We’ve identified some less common forms of repayment below:

Draw and repayment periods: In some instances, personal lines of credit can feature separate draw and repayment periods; allowing the borrower to withdraw funds during the draw period, while requiring them to make monthly payments during the repayment period.

Balloon payment: A personal line of credit may require payment of the entire balance at the end of the term, otherwise known as a balloon payment. Balloon payments come with the added need to refinance if the borrower is unable to repay the full amount.

Demand line of credit: In rare cases, banks may offer a "demand line of credit," which functions similarly to a standard line of credit, but gives the lender the right to call the loan for repayment at any time.

Typical Rates, Fees and Terms

Based on our review of the terms offered by some of the lending institutions, we’ve included a list of commonly offered rates, terms, and fees for personal lines of credit:

Average Interest Rates
Variable (based on Prime Rate), generally 9.30% - 17.55%
Term Range6 months - 5 years or flexible
Credit Limit Range$1,000 - $100,000
Average Fees
  • Annual maintenance fee: $25 - $50
  • No check processing fee
  • No prepayment penalty
  • Late payment fee: $32 or ~7.5% of monthly payment past due
  • Returned payment fee: $25 - $39
Repayment ScheduleMonthly

Pros and Cons

The main advantage of the personal line of credit is its flexibility; funds can be drawn and paid off repeatedly. This is a major advantage over more traditional fixed-term personal loans, which are paid out in one lump sum. There are also less restrictions on what a personal line of credit may be used for, unlike mortgages and auto loans.

Personal lines of credit, like credit cards and other forms of revolving credit, may negatively impact your credit score if you run up a high balance—usually around 30% or more of your established line of credit limit. While a personal line of credit might be an attractive option, there are situations for which a personal loan or credit card might be better suited.

  • Borrow only the money you need
  • Interest incurred only on funds borrowed
  • Flexible repayment options
  • Constant access to funds
  • Lower average APR than credit cards
  • Unsecured credit lines risk no collateral
  • Option to provide collateral for lower interest rates (secured loan)
  • Few restrictions on use
  • Ideal for long-term projects where the final costs are variable
  • Ideal for meeting temporary cash shortfalls
  • May draw up to 100% of credit limit without restrictions
  • Non-deductible interest expense
  • If interest rates increase, the variable rate on the line of credit also increases
  • Annual/monthly maintenance fees regardless of use
  • Higher rates than fixed-rate loans; not ideal for debt consolidation
  • Amount of interest charged may be more difficult to forecast
  • Fees/APRs vary widely by provider
  • Usually requires account at lending institution
  • Requires good credit score to qualify
  • Poor solution for long-term cash shortfalls
  • Temptation to spend due to ease of access
  • Persistently high balance can decrease credit score

A fixed-rate personal loan may be better for big-ticket purchases. Borrowers should be wary of the direction of prevailing interest rates if they wish to draw on a personal line of credit for an extended period of time. The long-term interest expense on large balances are magnified if rates increase.

Unless you intend to carry large balances for extended periods of time, a credit card may offer cheaper short-term flexibility in lieu of a personal line of credit. Credit cards feature reward points, cash-back offers, and airline miles, which incentivize borrowers to charge expenses. Additionally, credit card purchases feature a grace period, during which no interest is incurred if the balance is paid off in full.

How to Apply for a Personal Line of Credit

You will need a credit score of around 690 or better and a solid credit history to qualify for a personal line of credit. An established record of earnings and proof of employment are also important. Many institutions offering personal lines of credit require you to have a checking account with them and may require you to apply through a regional branch, which limits your options. The most important qualifications for a personal line of credit are:

  • Payment history: An established history of timely payments demonstrates that you are a responsible borrower.
  • Credit score: The credit score is calculated by the credit agencies, and reflects your financial condition and likelihood to pay back debts.
  • Financial condition: Your financial condition can include your debt-to-income ratio, cash on hand and net worth, which reflect your ability to pay back debts.

Where to Get a Personal Line of Credit

Traditionally, personal lines of credit are offered by banks and credit unions, although online lenders are entering the market. Based on our research, traditional banks and credit unions still offer the most competitive rates for personal lines of credit. Many of these will require you to apply through a local branch or require an existing checking account to qualify. Here’s a list of major banks that offer personal lines of credit, you can also read our piece comparing the best personal lines of credit:

APR Range
Loan Amount
Wells Fargo10.50% - 22.00% variable rate (as of 1/2/19)$3,000 - $100,0001 to 5 years
PNC BankStarting at 11%$1,000 - $25,000Flexible
TD Bank10.50% - 15.50% with AutoPay$20,000 - $50,00010 year draw period followed by 10 year repayment period
Citibank10.49% - 22.49% variable rate$1,500 - $25,000Flexible
US Bank12.50% variable rate$5,000 - $25,000Flexible
Regions Bank9.74% - 19.75% with AutoPay$3,000 - $50,000Flexible
KeyBank10.74% - 15.99%$2,000 - $50,000Flexible
Santander9.74% - 18.00% variable rate with ePay$5,000 - $35,0005 year draw period followed by 5 year repayment period