A personal line of credit is a type of loan that functions similarly to a credit card. You borrow a specific amount of money from a lender, but you only draw what you need and pay interest on what you utilize. Personal lines of credit are available from banks and credit unions, and consumers with good to exceptional credit (690 or above) often receive the best rates.
How does a personal line of credit work?
A lender will assign you a credit limit once you have been approved for a personal line of credit. Credit limits vary per lender, but often range from $500 to $50,000. You utilize funds up to the maximum as required, paying interest on what you use rather than the whole amount. It differs from an installment loan, which is repayable in full with interest over a certain period of time.
Line of credit requirements vary by kind and institution, but consumers with strong or exceptional credit are more likely to be granted at the lowest attainable rates. Personal lines of credit may offer lower interest rates than personal loans and credit cards, but they might change.
Most lines of credit have two stages:
Draw period: Once accepted for a line of credit, you are in the draw period, which allows you to utilize the cash as frequently as you like. During this period, you’ll get a monthly statement detailing any advances, payments, interest, and fees. You are liable for making minimum monthly payments or interest-only installments, depending on the lender. Paying more than the minimum payment helps you to save money over time.
Some lenders provide credit lines with continuous draw periods that can be left open.
Repayment period: After a set amount of time, the credit line is put into repayment and you are no longer able to withdraw money. During the repayment period, you pay principle and interest for the remainder of the loan term.
Types of credit lines
Personal lines of credit are often unsecured. This implies that the lender will solely consider information about you, such as your credit, income, and existing obligations, when determining whether you qualify for a line of credit. This information may also influence the amount and annual percentage rate (APR) you receive.
Some banks may allow you to obtain a line of credit using a savings or money market account. Securing a line of credit with collateral might help you qualify for a reduced interest rate.
house equity lines of credit are a type of secured credit line in which your house serves as security for the borrowed monies. If you fail to repay, the lender may repossess your property.
Business lines of credit: Business owners might utilize a line of credit to fund working capital or recurring needs. Business lines of credit can be unsecured, but a secured line of credit may allow you to access more money. Small firms can utilize inventory or property as collateral for a secured business line of credit.
Personal lines of credit
Personal lines of credit are most often available via credit unions and local banks, however some big banks also provide them. Credit line rates can range from 7% to 26%. A line of credit may also have an annual charge, which you must pay regardless of whether you utilize the available cash.
Many lenders accept online applications, but tiny financial institutions may require a phone call to get started. To apply for a line of credit, you may need to open a checking account with a bank or join a credit union.
When they perform best: A line of credit can make funds available for unforeseen costs. Personal lines of credit are also suitable for ongoing projects with variable prices and timetables, such as house or business repairs.
Credit Cards
Credit cards are often issued by banks or credit unions. The typical credit card APR is from 16% to 30%. You may normally apply for a credit card online and obtain it within seven to ten business days of approval.
When they perform best: Credit cards are designed for everyday use. You may use them to buy petrol or groceries, as well as to pay for furnishings or auto repairs. It’s important to maintain your credit usage at or below 30%, therefore credit cards aren’t great for spending that exceeds that limit.
Personal loans
Personal loans are available from banks, credit unions, and online lenders. These loans are often unsecured, with interest rates ranging from 6% to 36%.
Pre-qualifying for a personal loan online allows you to see prospective interest rates and loan amounts. Many lenders provide acceptance decisions within a day or two and transmit your cash in a lump sum within a few days of approval. Repayments for your loan normally begin within 30 days.
When they perform best: A personal loan is useful for major, one-time needs such as house repairs or consolidating high-interest bills.
How does a line of credit effect your credit score?
Applying for a personal line of credit necessitates a rigorous credit check, which can lower your credit score. This is often a brief dip of a few points.
Beyond that, the influence on your credit score is mostly determined by repayments. On-time payments on revolving credit lines can help you develop credit, but missing payments will hurt your score, so borrow only if you expect to repay it.
