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 due to a stack of unpaid invoices.
A personal line of credit, or PLOC, can be a viable option to help manage your daily cash flow. With this type of credit line, you’ll be able to access money as needed — giving you a viable safety net when money gets tight and bills are due.
Some people may confuse a PLOC with a personal loan. Knowing the difference between the two products can help you determine which one may be right for you — and how to use this 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, such as your home.
However, PLOCs are typically for consumers with a strong credit history. That factor, combined with other contingencies, means a PLOCs might not be the best option for everyone.
“You generally need good credit to qualify for a PLOC (say, 680-plus 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.”
How do personal lines of credit work?
A personal line of credit operates very much like a credit card, without actually being a credit card, says Adam Marlowe, principal experience officer for Georgia’s Own Credit Union.
“You would go and apply for a line of credit in whatever amount you need, but you don’t walk out of the bank with a check,” Marlowe says. “You access the money as you need to use it, and your repayment is based on what you’ve used.”
Once approved for a PLOC, you have access to funds via a revolving line of credit, Marlowe says. That money can be tapped in various ways, such as walking into a local branch of the lending institution and making a withdrawal or initiating a transfer via a mobile app.
It’s also important to note that most PLOCs have an expiration date, added Marlowe.
“Generally, you’re issued a personal line of credit for a time window until an expiration date,” Marlowe says. “So, for instance, if you need a $3,000 line of credit, we’ll grant that line of credit and it’s good for two years. You have open revolving line of credit for $3,000 for two years.”
During that time, you can keep borrowing from and repaying the line of credit. But at the end of two years, in order to continue to maintain the line of credit, you must reapply with the lending institution, Marlowe says.
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.
Depending on the institution, consumers may be able to access a personal line of credit through a local bank branch, a mobile app or electronic funds transfer, according to Marlowe, making them a convenient source of funding. And, as you repay the funds, you’re able to tap into your PLOC again and again.
Keep in mind, though, that if you use your line of credit as overdraft protection, there may be additional fees to pay, Marlowe says.
However, when used wisely, a PLOC can be a great resource, added Dave Sullivan, credit expert with People Driven Credit Union.
“What’s great is that it’s there if you need it and if you don’t need it, you don’t pay any interest,” Sullivan says.
The interest rates on a PLOC are also extremely competitive, Sullivan says.
“When you do need it, it’s much more affordable than the interest rate on a credit card,” Sullivan says. “The interest on a personal line of credit can be anywhere from 8 percent to 10 percent – almost half as much as the interest on a credit card.”
Drawbacks of PLOC
- Rates are often higher than HELOCs.
- Interest isn’t tax-deductible.
- Hard to qualify with poor credit.
There are some drawbacks to consider before applying for a personal line of credit.
For instance, when compared with home equity lines of credit (HELOCs), your standard PLOC tends to have higher interest rates.
“PLOCs have slightly higher rates, there’s no doubt about it,” says Josh Miller, a senior product management manager with Wells Fargo. “But they don’t require utilizing the equity in your home. Since the housing crisis, many people don’t want to tap into the equity in their homes.”
Rates on HELOCs have hovered around 6.6 percent recently, according to Bankrate’s weekly survey of rates across the nation.
With a PLOC, you also run the risk of temptation to over-borrow if you lack the discipline to handle a personal line of credit, Sullivan says.
“It can get away from you just like any line of credit,” says Sullivan of People Driven Credit Union. “You’re using it and using it and the next thing you know you’ve used $1,000 and then $2,000, and suddenly you’re maxed out and having trouble making the payments.”
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.
Another factor to consider, the interest you pay on a PLOC is not tax-deductible. But it has also become more challenging to deduct the interest on HELOCs as well since the passage of the Tax Cuts and Jobs Act of 2017. Now, HELOCs are only tax-deductible if they are used for home improvements.
“If you can, it’s a good idea to always have interest you pay be tax-deductible,” Sullivan says.
Secured and unsecured lines of credit
An unsecured line of credit is issued based on factors such as your credit score and income, and may also take into consideration how long you’ve been in a job and whether you can afford to repay the debt if the line of credit is maxed out, says Sullivan.
There is no asset that serves as collateral should you default on payments for an unsecured line of credit.
A secured line of credit on the other hand has a physical asset, such as a house or car, associated with it that serves as collateral. If the loan is not repaid that asset can be seized by the lender.
“The asset could be a motorcycle, a boat, basically some sort of physical object that could be repossessed if the loan is not repaid,” Sullivan says. “People even put up artwork or jewelry.”
Getting a PLOC: How to qualify
Two things you’ll need to get a line of credit:
- A good credit score.
- Solid credit history.
And it just so happens, we can help you gain a better perspective on your credit history and credit score. (Check yours for free at Bankrate.)
“You want to have the best credit you can have,” Sullivan says. “If you have any revolving lines of credit, it’s best to pay those down as low as you can prior to applying, and make sure that info has been reported to the credit bureaus.”
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.
The actual application process for a PLOC is much the same as applying for any loan, added Sullivan. You apply with a bank, credit union or some other financial institution for the credit limit you’re seeking.
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, says Miller, adding that customers can also now apply and sign for a line of credit digitally, which is not something all lenders allow.
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, says Marlowe of Georgia’s Own Credit Union. Interest is paid on the entire loan, often at a fixed rate, until it’s paid off in full.
“With a personal loan if you apply for $2,500 for instance, the lender will take $2,500 and put into (your) checking account and set up regularly scheduled payments,” Marlowe says. “It doesn’t have the capability to be revolving. So, if you need another $1,000 six months down the road, you have to go back in and apply again.”
PLOCs on the other hand are not 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 based on financial market conditions, 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 (with a personal loan) 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 (with a PLOC),” Rossman says.
When to use (and not use) a personal line of credit
Typically, customers open lines to fund major purchases, expected or unexpected expenses, or to manage cash flow.
“Generally, you should use it for things that pop up and that are unforeseen,” Sullivan says. “You want to use it as a back-up, not for gas or daily expenses. If you’re using it for everyday expenses, then you’re on the road toward financial hardship.”
Emergency car repairs, tuition payments and unexpectedly high utility bills are some of the ways you might use a personal line of credit, says Marlowe of Georgia’s Own Credit Union.
“Some people who are working full time but also going to school to earn another degree will use a personal line of credit to make tuition payments,” Marlowe says. “Especially if their employer has a reimbursement program.”
Since PLOCs are ongoing lines of credit, they’re considered a greater risk for the lender than personal loans; therefore, they are usually better for borrowers with great credit histories who are eligible for the best rates and more likely to qualify. Those who are working to repair bad credit might not qualify, and should consider other methods of borrowing.
Overall, a PLOC 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, however, 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?”