debt

Borrowing with personal lines of credit

He says increased interest in personal lines of credit stems from "people turning away from credit cards and looking for other options."

How to get one

Obtaining a personal line of credit typically requires a good credit score and solid credit history. However, as with HELOCs, lenders burned by the financial crisis are less willing to extend this type of credit than they were in the past.

So, 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 and possibly being 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."

Alverson agrees that it's best to apply sooner rather than later, since most forms of credit today "are being evaluated and managed more aggressively by banks to limit their exposure."

"Get it before you need it," he says.

Personal line of credit drawbacks
  1. Rates often higher than HELOC.
  2. Interest not tax-deductible.
  3. Hard to qualify with poor credit.
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 $5,000 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 business manager for personal credit management at Wells Fargo.

Most requests are for amounts below $10,000. When someone wants to take out a line of $50,000 or more, "there's a much more rigorous review of the client," Vallat says. At that point, paperwork such as tax returns and documentation of personal assets is necessary for approval, he says.

Wells Fargo has surveyed its clients who have personal lines of credit and found that funds are typically used to consolidate debt, pay education or medical costs, or pay for used cars or home improvements. The money is usually repaid within 12 to 18 months, Vallat says.

At North Carolina State Employees Credit Union, based in Raleigh, N.C., about one-tenth of the credit union's 1.5 million customers have personal lines of credit, although not all are actively used, says Bobby Gardner, senior vice president of lending.

He acknowledges that most customers "use them for things they probably should be budgeting for," such as vehicle repairs, furniture, educational expenses and insurance costs.

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They have remained popular over the years because "not all of our members are going to have a home," so a HELOC is not always an option, Gardner says.

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.

For example, customers who open a personal line of credit at the NCSECU pay double-digit interest rates for the privilege of borrowing.

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