Takeaways
- Personal lines of credit are revolving credit accounts available to account holders.
- Personal lines of credit are unsecured loans with variable interest rates.
- Personal lines of credit allow you to borrow up to your approved credit limit.
- Personal lines of credit require a checking account with the institution.
- Banks, credit unions, and other institutions issue personal lines of credit.
What Is a Personal Line of Credit?
A personal line of credit, sometimes called a PLOC, is a revolving credit account at a bank, credit union, or other financial institution. A personal line of credit allows you to borrow up to a predetermined maximum credit limit.
A personal line of credit functions much more like a credit card, unlike a traditional personal loan, where you are issued a total lump sum principal to be repaid later in installments. You can withdraw funds when needed, repay the debt, and then borrow again from your line of credit. This process can be repeated for the term of the PLOC.
A personal line of credit is an incredibly flexible financial tool for managing monthly cash flow, handling unexpected expenses, and funding large-ticket purchases.
Interest payments are only based on the amount borrowed. Unlike a credit card, a personal line of credit typically has a significantly lower interest rate, making it one of the more affordable ways to borrow money.
Personal lines of credit are unsecured debt, so approval is almost exclusively based on your credit score, discretionary income, debt-to-income ratio, and other financial metrics.
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How to Get a Personal Line of Credit?
You must apply at your bank, credit union, or other financial institution to get a personal line of credit.
The first step is to check your credit score since most lenders will require a FICO score considered “good” to “excellent” to issue an approval. A higher credit score will increase your chances of quick approval and help you secure better terms and rates.
Learn More: How to Increase Your Credit Score by 100 Points
Once you have established that you will be a good candidate, you must gather the financial documents and paperwork needed for a loan application. As a rule of thumb, lenders will require proof of income, employment history, and potentially other information to assess your current debt load.
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While you can (and should) shop around with lenders to take advantage of the best offers for terms, interest rates, and accessibility, most people usually use their current bank or credit union.
To use a PLOC, you must open a checking account with a bank or credit union. Once approved for your PLOC, you can write checks and make transfers using the funds you borrowed from your checking account.
Once you have chosen a lender, you submit a formal application in person or online. At this point, the lender will issue a hard credit pull, or hard inquiry, and assess your eligibility.
Your lender will evaluate your credit and relative financial stability during the application process. You will receive an offer for your personal line of credit with the corresponding terms and conditions if approved.
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Advantages of a PLOC
A personal line of credit offers many advantages that make it appealing for people who need quick access to credit. Here are commonly cited pros of a personal line of credit:
- Quick Access to Credit: Unlike an installment loan, a personal line of credit lets you access credit for a set period. Although it isn’t an open-ended credit account, like a credit card, it gives you easy access to credit funds at better terms.
- Unsecured Financing: Personal lines of credit are unsecured loans. Unsecured loans are loans you don’t have to back up with collateral like your car, house, or investments. This is opposed to a secured financing option, where you must put collateral at risk to secure more favorable financing terms.
- Improved Credit Score: Since it is a revolving account, a personal line of credit can help you improve your credit score considerably. Because you have more access to credit, your credit utilization ratio improves. Although the term for the revolving credit account is limited, borrowing funds and making timely payments can improve your credit score. (Try Smart Money’s Credit Utilization Calculator.)
- Low Interest Rate: Interest rates on other forms of revolving credit can be much higher. For example, according to Lending Tree, the average interest rate for credit cards in 2024 was 24.80%.[1] PLOC interest rates are usually much lower, giving you access to cheaper funds.
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Disadvantages of a PLOC
Using debt comes with disadvantages, and not all avenues of securing credit are equal. A personal line of credit certainly has idiosyncratic cons, including:
- Variable Interest Rates: One of the biggest disadvantages of a personal line of credit is the potential for high variable interest rates. PLOCs are not fixed-rate loans, like personal loans, which means the interest rate can fluctuate with the market conditions. If your interest rate suddenly spikes, it can mean much higher monthly payments.
Read More: What Is the Federal Funds Rate?
- Potential for Overspending: A personal line of credit can tempt you to spend excessively because the funds are so easily accessible. With this use-it-or-lose-it approach to credit, borrowers without a budget, with poor financial discipline, or with no financial plan may quickly accumulate debt.
- Multiple Fees: PLOCs often have a long list of fees that can add up quickly. You will have to pay application fees, annual and monthly maintenance fees, origination fees, and late payment fees.
- Reapplication: Personal lines of credit are not open-ended like credit cards. After the draw period expires, you must reapply to regain your credit line. Before haphazardly opening an account, ensure you will utilize your line of credit.
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Types of Lines of Credit
Several types of credit lines are designed to fit different financial needs. The main types include personal lines of credit, home equity lines of credit, and business lines of credit.
- Personal Line of Credit: A personal line of credit is an unsecured, revolving loan option that gives you flexible access to funds.[2] Since it is not secured by any physical collateral, it will be based solely on your creditworthiness.
Read Also: What Is a FICO Credit Score?
A personal line of credit (PLOC) is an excellent tool for managing unexpected expenses, consolidating debt, or even managing irregular income or revenue streams. It is flexible in both borrowing and repayment, making it a prime choice for personal financial management.
- Home Equity Loan: A home equity line of credit, also known as a HELOC, is a secured revolving loan collateralized by the equity you have accrued in your home. A home equity line of credit offers much higher credit limits and lower interest rates when compared to typical personal lines of credit because the loan is secured.
Learn More: Smart Money's Ultimate Homebuyers Guide
Many borrowers use a home equity line of credit to fund large home improvement projects, finance big purchases, or consolidate more significant amounts of debt. Another perk of a home equity line of credit is that the interest paid can be tax-deductible, helping reduce the homeowner's tax liability.
- Business Line of Credit: Business lines of credit create access to funding for businesses that can be used to fund a variety of expenses. They can assist in managing irregular cash flow, filling a gap in payroll, purchasing inventory, or funding growth or expansion projects.
Get More: What Is a Business Loan?
Business lines of credit can be secured or unsecured, depending on the business’s credit profile, balance sheet, and financial stability. They can also give a company more flexibility and wiggle room by giving them an avenue to debt financing. This can be critical during revenue lulls or sudden and unexpected expenses.
Smart Summary
Whether taking out a personal finance loan or considering another type of revolving credit account, maintaining an excellent credit score will help you secure better annual percentage rates (APR) and other loan terms. Maintaining healthy money habits like budgeting, building an emergency fund, and paying off your debts will help secure a solid financial position. Multiple financing options are available, so explore the market and secure a line of credit that makes sense for you and your financial situation.
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(1) Lending Tree. Average Credit Card Interest Rate in America Today. Last Accessed January 14, 2025.
(2) Consumer Financial Protection Bureau. What is a Personal Line of Credit? Last Accessed January 14, 2025.
