What Is a Personal Line of Credit?

A personal line of credit can offer convenient access to cash when you need money for debt consolidation, home improvements, or emergency expenses. Unlike with personal loans, you only pay interest on the part of your personal line of credit that you use. 

Personal lines of credit are an alternative to credit cards, which may come with high interest rates. You might consider a personal line of credit if you need flexible funding.

How does a personal line of credit work?

A personal line of credit is a revolving credit line. Personal lines of credit can be either “unsecured” (you do not need to offer the lender collateral)  or “secured” (you do need to offer collateral).

When you're approved for a personal line of credit, you have a set credit limit that you can borrow from. For example, you might have a $25,000 credit limit. 

How do you draw from a personal line of credit?

You can tap into that credit as needed, for virtually any purpose. Depending on the lender, you may have access to your personal line of credit via:

• Paper checks
• Debit card or ATM card
• Bank-account transfers

As you make withdrawals or purchases, your available credit shrinks. Once you reach your credit limit, you can no longer tap your personal line of credit until you pay off some of your debt. Meanwhile, when you make payments toward your outstanding balance, the amount that you can borrow from your personal line of credit subsequently increases. 

What is the difference between a personal line of credit and a credit card?

Both personal lines of credit and credit cards are revolving credit lines. While a credit card can be used indefinitely as long as your account remains in good standing, a personal line of credit typically has an expiration date. Credit cards can also earn rewards for purchases, while a personal line of credit usually does not earn rewards. \

Below is an overview of how these two forms of borrowing compare.

One important difference between a personal line of credit and a credit card lies in how much you might be able to borrow. Depending on the lender, you may be able to get a personal line of credit for, say,  $50,000 or even $100,000. Credit cards, by comparison, typically have lower credit limits. 

How can you use a personal line of credit? 

One advantage of a personal line of credit is that you can use it to meet different needs or financial goals. Some of the best uses for a personal line of credit include:

• Consolidating high-interest credit cards or other debts
• Paying medical expenses
• Covering emergency expenses
• Making home improvements or repairs
• Funding large expenses, such as a wedding
• Paying for smaller purchases, like new furniture or a vacation 
• Covering basic living expenses if you're temporarily out of work
• Starting or growing a business
• As overdraft protection for a checking account

You might also use a personal loan or personal line of credit in place of an auto loan if you want to buy a car. Generally, there's not much you can't use a personal line of credit for.

Some lenders, however, do make an exception for higher education. For example, you might be able to use a personal line of credit to pay for a student's living expenses, but not college tuition. If you have to borrow, however, you're typically better off exploring federal student loans first; such loans offer low, fixed, interest rates and built-in borrower protections. 

How to qualify for a personal line of credit

If you're interested in getting a personal line of credit, it's helpful to understand what lenders consider. 

Generally, to qualify for a personal line of credit, you'll need a good credit score and steady income. The minimum credit score requirements for personal lines of credit vary from lender to lender. The higher your credit score, the easier it may be to get approved and qualify for the best rates. 

It's important to shop around and compare different personal line-of-credit options. Again, you can find personal lines of credit offered at traditional banks, credit unions, and online lenders. 

When comparing personal lines of credit, pay attention to:

• Minimum and maximum loan amounts
• Draw period and repayment terms
• Interest rates
• Monthly or annual fees
• Credit score and income requirements

You may also want to consider differences in funding speed if you need access to cash quickly. With online lenders, for instance, it's possible to get approved and get funded in as little as one to two business days.

Personal line-of-credit rates

A personal line of credit typically offers variable, rather than fixed, interest rates. (Fixed rates stay the same for the life of the loan; variable rates can move up or down, according to movements in a benchmark interest rate.) 

For that reason, it's important to angle for the lowest rates possible on a personal line of credit, since that rate could increase later. Personal line-of-credit rates may start below 10% for the most creditworthy borrowers. But it's also possible to see rates of 30% or more. 

Again, the rates that you pay for a personal line of credit will hinge largely on your credit score and income. Checking your credit before you apply for a personal line of credit can give you an idea of what kind of rates you're likely to qualify for. 

How much can I get on a personal line of credit?

The amount you can borrow with a personal line of credit will depend on the lender and what you're approved for. Your credit limit may range anywhere from a few hundred dollars to several thousand dollars to $100,000. 

When applying for a personal line of credit, it's important to consider how much money you'll actually need. Getting, say, a $100,000 credit line might sound good. Yet if you only need to borrow $25,000, the extra available credit might be a temptation to spend. That greater credit line could therefore cost you more in interest over the long run. 

Pros and cons of a personal line of credit

A personal line of credit might seem more appealing than a credit card or home equity line of credit (HELOC). However,  a personal line of credit is not necessarily right for everyone. Before you apply for one, it's helpful to weigh the potential advantages and disadvantages. 

Is a personal line of credit right for you?

Whether it makes sense to take out a personal line of credit can depend on your financial situation and what you plan to use the money for. Fast funding and the potential for low rates could make it an attractive option when you need cash. Reviewing your credit scores and budget can help you compare personal lines of credit against other borrowing options, to find the right one for you.