If you’re a freelancer or independent contractor, you may already know from experience about the woes of hunting down payments from clients. It can leave you feeling like someone who makes decent money, but doesn’t always have cash readily available.
Personal lines of credit, or PLOCs, can be viable options to help manage your cash flow. With these credit lines, you’ll be able to access money as needed — giving you a viable safety net.
Some people may confuse PLOCs with personal loans. Knowing the difference between the two products can help you determine which one may be right for you — and how to use the form of credit properly.
What is a personal line of credit (PLOC)?
A personal line of credit is an unsecured revolving account with a variable interest rate, according to CreditCards.com. This method of credit is usually cheaper than a credit card cash advance and offers the benefit of not requiring collateral.
That being said, however, PLOCs are typically for consumers with a strong credit history. That factor, combined with other contingencies, means PLOCs might not be the best option for everyone.
“You generally need good credit to qualify for a PLOC (say, 680+ on the FICO scale) because this is unsecured credit,” says Ted Rossman, industry analyst at Creditcards.com. “You’re not putting your home, car or any other collateral on the line.”
Advantages of a PLOC
- Quick access to funds
- Overdraft protection on some accounts
- Competitive rates
- Alternative to a home equity line of credit, or HELOC
A personal line of credit can be a great resource when it’s used wisely, says Susan Tiffany, retired 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, there are drawbacks to consider before you apply for a line of credit. Compared with home equity lines of credit (HELOCs), your standard PLOC tends to have higher interest rates. You also run the risk of temptation to over-borrow if you lack the discipline to handle a personal line of credit. If you think you might fall in this category, you might do better with a more predictable method of borrowing such as a personal loan. In that case, here’s where you can find the best personal loan rates.
A personal line of credit can be a convenient and long-lasting source of funding. And, as you repay those funds, you are able to tap into your PLOC again and again, unlike with a loan where you would have to apply and reapply for new funds.
Interest on PLOCs are charged only on the amount of money borrowed. Depending on the institution, consumers may be able to access the money through checks, electronic funds transfer (EFT), ATMs or a local bank branch.
Drawbacks of PLOC
- Rates are often higher than HELOCs
- Interest isn’t tax-deductible
- 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 $3,000 to $100,000.
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 a nominal annual fee of $25.
In addition, interest rate discounts may be available for customers with qualifying Wells Fargo checking accounts or who have set up automatic payments.
Typically, customers open lines to fund major purchases, expected or unexpected expenses, or to manage cash flow.
It bears repeating just the stark contrast between the interest rates on a personal line of credit versus a home equity line of credit. Generally, you’ll be dealing with higher rates when you apply for a line of credit.
By contrast, rates on HELOCs have hovered around 7 percent recently, according to Bankrate’s weekly survey of rates across the nation.
Interest payments on HELOCs used to be tax-deductible, but the Tax Cuts and Jobs Act of 2017 changed that. Now, HELOCs are only tax-deductible if they are used for home improvements.
Getting a PLOC: How to qualify
Two things you’ll need when determining how to get a line of credit:
- A good credit score
- Solid credit history
As it just so happens, we can help you gain a better perspective on your credit history and score. (Check yours for free at Bankrate.)
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.”
And although a personal line of credit may have higher rates than a HELOC, the interest rates on PLOCs are usually much lower than a credit card cash advance or payday loan.
Personal line of credit vs. personal loan: How they differ
Although PLOCs and personal loans sound similar, they are two different types of credit. Understanding the difference between the two can help individuals make informed decisions about which product might be best for them.
Personal loans are paid in a lump sum and can be deposited directly into a bank account. These loans are normally used for paying down credit card debt, financing large purchases or paying off student loans. Interest is paid on the entire loan, often at a fixed rate, until it’s paid off in full.
PLOCs aren’t paid in lump sums; instead, they are lines of credit and amounts can be accessed as needed. Interest is variable, meaning it is subject to change, and interest is only paid on the portion of the line of credit used.
“It’s the difference between borrowing $20,000 all at once and starting that interest clock immediately, versus $5,000 now and then another $5,000 in three months and $10,000 six months after that (you can do this with a PLOC),” Rossman says.
Since PLOCs are ongoing lines of credit, they’re considered a greater risk for the lender than personal loans; therefore, they are usually for borrowers with great credit histories. Those who are working to repair bad credit might not qualify, and should consider other methods of borrowing.
Overall, PLOCs can be a great method of borrowing. These loans offer flexible terms and can help aid in cash flow.
Before agreeing to any new borrowing, be sure to determine your level of need. Each product is different, and you’ll want to choose the best one for your needs.
“The final determination on which source of funding to choose is going to be an individual decision,” Rossman says. “For example, what do you need the funds for, and for how long? Are you comfortable putting your home up as collateral? Which option has the lowest interest expense, factoring in tax deductibility, if applicable?”