Unlike what you have come to expect from a personal loan, a personal line of credit (PLOC) is quite a different experience entirely. For one, you usually apply for a line of credit only when you have an expense (or expenses) that is ongoing. This could include funding a wedding — you may not know right off the bat just how much you need. With a personal line of credit, you’re allowed a little extra flexibility as you are establishing an ongoing borrowing relationship with a financial institution.
Advantages of a personal line of credit (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 to 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, we can help you find the best personal loan rates.
Easy access to money
Borrowers who know how to get a line of credit will know the ease of access to money. 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 re-apply for new loans.
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 a line of credit
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 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.”
Drawbacks of a personal line of credit (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 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
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 5.6% 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 a personal line 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.
And although a personal line of credit may have higher rates than a HELOC, the interest rates on personal lines of credit (PLOC) are usually much lower than a credit card cash advance or a payday loan.
PERSONAL LINE OF CREDIT VS. PERSONAL LOANS: Learn the difference and see which is right for you.