smart spending

Borrowing with personal lines of credit

Money falling from sky into a pile © iStock

When Laura Poole planned her wedding 15 years ago, she found she needed a little help to make her big day extra special. So Poole took out a personal line of credit.

Personal lines of credit allow consumers like Poole to establish unsecured, ongoing borrowing relationships with financial institutions.

Thanks to her credit line, Poole could pay for the wedding she wanted. Over the years, she's tapped into the line to pay off high-interest credit cards, cover unexpected car repairs and pay larger-than-expected tax bills.

"It just offers me a little extra flexibility," says the life coach and freelance book editor from Durham, North Carolina. "It's a great option if you have good credit."

Advantages: personal line of credit © Bigstock

A personal line of credit can be a great resource when it's used wisely, says Susan Tiffany, who retired in May from the Credit Union National Association in Madison, Wisconsin, where she served as director of consumer periodicals.

"Think of it as tide-you-over money rather than flat-screen TV money," says Tiffany, who recommends a personal line of credit as a "temporary, stopgap substitute for emergency funds."

However, personal lines of credit also have drawbacks. Interest rates tend to be higher compared with similar products, such as home equity lines of credit. And consumers must be disciplined to avoid overborrowing.

Easy access to money

Borrowers who open a line of credit can tap into those funds as needs arise. As funds are repaid, the borrower can tap into the line of credit again and again without having to apply for new loans repeatedly.

Interest is charged only on the amount of money borrowed. Depending on the institution, consumers may be able to access the money through checks, Internet transfers, ATMs or a local bank branch.

How to get one

Obtaining a personal line of credit typically requires a good credit score and solid credit history. You should check your credit report and credit score before applying for a new loan. Check yours for free at myBankrate.

It's best to apply for a personal line of credit when your finances are healthy, Tiffany says, rather than waiting until you're in dire straits and possibly a little less eligible.

"If you can qualify for a personal line of credit, you're smart to take one out," Tiffany says. "You should set it up when you're in a position to be eligible for one."

Disadvantages of a personal line of credit © Bigstock

A quick survey of banks and credit unions finds that personal lines of credit are available in a variety of amounts and interest rates. San Francisco-based Wells Fargo offers personal lines of credit in amounts ranging from $3,000 to $100,000.

Underwriters are likely to approve borrowers with a strong credit history, a good relationship with the bank and verifiable earnings, says Brent Vallat, senior vice president and head of consumer credit card, lines and loans at Wells Fargo.

Customers who apply at Wells Fargo can often receive a decision within 15 minutes and access the funds in as little as one business day. The bank offers a competitive variable interest rate, no collateral required, no cash advance or balance transfer fees and an annual fee of $25.

In addition, interest rate discounts may be available for customers with qualifying Wells Fargo checking accounts.

Typically, customers open lines to fund major purchases, expected or unexpected expenses, or to manage cash flow.

High rates, other drawbacks

While personal lines of credit may be the right choice for some, they also have drawbacks. For starters, personal lines of credit often have higher interest rates than HELOCs.

At Boeing Employees Credit Union in Seattle, pricing is risk-based, so the interest rate can run the gamut from 8.9% to 18%, says risk-model manager Will Gix.

The interest rates are slightly higher than those on BECU's Visa credit card because the credit union has found that personal lines of credit carry a slightly higher risk of buyer default than the credit cards, Gix says.

By contrast, rates on HELOCs have hovered around 4.7% in recent months, according to Bankrate's weekly survey of rates across the nation. To see the latest rates, click here.

In addition, interest payments on HELOCs generally are tax-deductible. That is not the case with personal lines of credit.

Convenience, other advantages

Still, personal lines of credit do have advantages. Many are tied to a checking account and also provide overdraft protection. People who are approved for a personal line of credit often can access the money within a day or two.

"A lot of people are starting to catch on to how easy and convenient they are to use," says Clarissa Rodriguez, assistant vice president of corporate communications with Security Service Federal Credit Union in San Antonio.

And although personal lines of credit may have higher rates than HELOCs, the interest rates on personal lines of credit are usually much lower than a credit card cash advance or a payday loan.

Vallat believes personal lines of credit are a good option for many borrowers.

"It's a really smart tool to have in your financial tool chest," he says.

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Finding cash to fund your dreams Should you use a home equity loan or line of credit to replace your roof? Supplement your retirement income? Find out which scenarios make the most sense for you.
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