What is a personal line of credit and how does it work?

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What is a personal line of credit (PLOC)?

A personal line of credit (PLOC) is an unsecured revolving account with a variable interest rate.  It’s a type of loan you can draw from as needed and pay back with interest, much like a credit card. It can be a viable option to help manage your daily cash flow, especially if you have an irregular income or are faced with an unexpected expense.

PLOCs generally have lower interest rates than credit cards, so they’re typically cheaper for big cash advances. However, because PLOCs are unsecured, they’re best for consumers with a strong credit history. This means that a PLOC 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 does a personal line of credit work?

A personal line of credit operates much like a credit card.

“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,” says Adam Marlowe, principal market development officer for Georgia’s Own Credit Union. “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. That money can be tapped in various ways, such as withdrawing it at one of the lending institution’s local branches or initiating a transfer via a mobile app. Every draw will have to be repaid with interest, which is variable — meaning your interest rate will rise and fall based on market fluctuations.

It’s also important to note that most PLOCs have an expiration date.

“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,” Marlowe says. “You have an 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, up to the line’s limit. But at the end of two years, in order to continue to maintain the line of credit, you’d have to reapply with the lending institution.

What to use personal lines of credit for

Common uses of personal lines of credit might include funding major purchases, covering unexpected expenses or managing cash flow.

“Generally, you should use it for things that pop up and that are unforeseen,” says Dave Sullivan, credit expert with People Driven Credit Union. “You want to use it as a backup, 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 other ways you might use a personal line of credit.

How to get a personal line of credit

There are two things you’ll need if you want to get a personal line of credit: a good credit score and solid credit history.

“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 something like a home equity line of credit (HELOC), the interest rates on PLOCs are usually much lower than those of a credit card cash advance or payday loan.

The application process for a PLOC is much the same as applying for any loan, and it can often be completed online. Once you’ve decided on a lender and the credit limit you’re seeking, you’ll need to provide information such as your name, Social Security number and employment and income details. With many online lenders, you can access funds in as little as one business day if you’re approved.

Pros and cons of personal lines of credit

A personal line of credit has several advantages when compared to other sources of fast capital, but it’s not the right choice for everyone. Consider both the benefits and drawbacks before applying.

Pros Cons
Quick access to funds Higher rates than HELOCs
Overdraft protection on some accounts Interest isn’t tax deductible
Competitive rates compared to credit cards or payday loans Hard to qualify with poor credit and/or a limited credit history
No collateral required Risk of over-borrowing
Only pay for the draws that you make Variable interest rates

PLOC vs. personal loan

Although personal lines of credit and personal loans sound similar, they are two different types of credit.

When you receive a personal loan, you receive a lump sum that can be deposited directly into a bank account. You’ll make monthly payments on both the principal and interest, often at a fixed rate, until it’s paid off in full.

PLOCs, on the other hand, are not paid in lump sums; instead, they open up funds that can be accessed as needed. Interest is variable, meaning it is subject to change based on conditions in the financial market, and you have to pay back principal and interest only on the portion of the line of credit you use.

“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.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Other types of credit lines

A personal line of credit is not the right choice for everyone. You may want an alternative if you have business expenses or a lot of equity in your home.

Business lines of credit

A business line of credit and a personal line of credit are functionally the same — you’ll receive a credit limit, which you can draw up to and pay back as needed. However, business lines of credit may have higher limits and are designed specifically for businesses. A business may use a line of credit for equipment purchases, short-term cash flow issues and more.

Home equity lines of credit (HELOCs)

A home equity line of credit uses the equity you’ve built up in your home to determine your borrowing amount. Unlike personal lines of credit, these loans are secured — meaning your home is used as collateral for the loan, and failing to repay the loan could put your home at risk of foreclosure. However, because you take on more risk with this type of borrowing, interest rates are often much lower.

The bottom line

A personal line of credit can be a great method of borrowing, especially for people with great credit histories. It offers flexible terms and can help with cash flow or big expenses.

Before agreeing to any new borrowing, assess your needs and make sure that you have room in your budget for a new monthly payment. If you’re ready to apply, shop around with a few lenders to compare rates.

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Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a contributing writer for Bankrate. Dan writes about loans, home equity and debt management.
Edited by
Associate loans editor