debt

Borrowing with personal lines of credit

Highlights
  • Personal lines of credit offer a borrowing alternative to HELOCs.
  • Rates tend to be higher than HELOCs and some credit cards.
  • Self-discipline is needed to avoid spending into debt trouble.

When Laura Poole planned her wedding nine years ago, she found many vendors didn't accept credit cards. Needing a little help to make her big day extra special, she 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, N.C. "It's a great option if you have good credit."

Advantages: personal line of credit
  1. Quick access to funds.
  2. Overdraft protection on some accounts.
  3. Competitive rates.
  4. Alternative to HELOC.
A personal line of credit can be a great resource when it's used wisely, says Susan Tiffany, the Madison, Wis.-based director of personal finance information for adults with the Credit Union National Association.

"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. As with other forms of credit, lenders are becoming more cautious about issuing new personal lines of credit.

In addition, because a personal line of credit is so easy to access, consumers must be "really disciplined" to avoid overborrowing, says Curtis Arnold, founder of CardRatings.com and author of two recent personal finance books.

"Convenience is a double-edged sword," he says. "It can be too convenient."

Boom to bust

During the housing boom, many people turned to HELOCs when they needed quick cash to pay for expected -- and unexpected -- expenses.

However, HELOCs can be tough to find today, especially in states such as Florida, California and Arizona, which have seen the bottom drop out of their housing markets.

"Standards are much tighter than they were a year ago" as banks try to weed out risky prospects, says Kenneth Alverson, managing director at the New York management consultancy Novantas.

Consumers shut out of the HELOC market might find a personal line of credit to be an attractive borrowing alternative.

Borrowers who use these products open a line of credit and 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.

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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.

Arnold says he's "seen an uptick in the marketing of these products" in the past six to 12 months, with more offers landing in his home mailbox.

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