Personal Line of Credit: Definition, Types, and Advantages

Are you having a hard time finding a traditional bank loan that you qualify for? Opening a personal Line of Credit could be a good alternative. 

What is a personal Line of Credit? 

Lines of Credit are similar to credit cards in that you’re approved for a set credit limit. Once you open a credit line, you can withdraw whatever amount you need up to that limit — at any time! 

You’ll usually apply for this type of loan through a credit union, bank, or an online lender. If approved, you can use the money as you see fit. Best of all, you’re only charged interest on the money borrowed, not the approved limit (unless you borrow the maximum amount). 

As long as you keep your Line of Credit open and are current on your interest payments, you can access the available funds anytime. 

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Types of personal Lines of Credit 

It’s important to determine what type of credit line you’ll need based on your needs. 

Unsecured Line of Credit vs. secured Line of Credit 

An unsecured personal Line of Credit doesn’t require you to put up a valuable item, such as your home, as collateral. Unsecured credit lines typically have higher interest rates than secured ones, and you’ll need to meet certain requirements to receive one. 

Alternatively, secured personal credit lines require collateral that the lender keeps in the event that you cannot pay your loan back. One common type is a home equity line of credit (HELOC), which uses your home’s value as collateral. 

Revolving vs. non-revolving Line of Credit 

A non-revolving personal Line of Credit allows you to receive a lump sum in a dedicated credit account. You can then withdraw money from that account as needed until the money is gone or you choose to open a new line. 

With a revolving Line of Credit, you don't receive a lump sum upfront. Instead, you’re approved for a predetermined credit limit. You can then withdraw any amount from your credit line up to that limit. As long as you repay what you draw, plus interest, your credit line stays open and revolving for you to use whenever you need it. 

Personal Line of Credit 

A personal Line of Credit is a type of unsecured loan that you can use to pay off other debts or cover urgent needs, including emergency expenses, home or auto repairs, and medical bills. It’s a good option for those who get irregular paychecks or experience something unexpected. 

The amount of money available in your personal Line of Credit is determined by your lender and usually depends on: 

• The type of credit you choose 
• Your credit score 
• Your income 

Business credit line 

If you have a business and need a little extra money to cover expenses, opening a business credit line could be a good option. 

This type of line of credit can be either secured or unsecured and allows business owners to draw from the funds as needed to pay for business-related expenses, such as payroll, inventory, and marketing. 

Application acceptance and the amount of money available depends on: 

• Your credit history and credit score 
• How long you’ve been in business 
• The business’s financial history 

Home equity line of credit 

A home equity line of credit (HELOC) is a secured loan that's based on the market value of your home minus the outstanding balance of your mortgage. A HELOC allows for a very sizeable credit line, but you also risk losing your home if you can't repay your lender. 

You can use a HELOC for anything you’d like, but homeowners typically open one for: 

• Home improvements and repairs 
• Consolidating debt 
• Keeping an emergency fund ready and available 
• Paying for college education 
• Buying property 

Similar to the personal Lines of Credit, you’ll only pay interest on the amount you use from the loan. 

Advantages of using a personal Line of Credit 

You may be able to get one with poor credit 

Qualifying for a large personal loan can be challenging if you have bad or no credit. If you fall into one of these credit categories, opening a Line of Credit can be a viable option. 

Some lenders, like Advance America, will clearly state that they don’t require good credit to receive a personal Line of Credit. Instead, they look at your employment history and income when making an approval decision. 

You only pay interest on the amount you borrow 

Another advantage of having a Line of Credit is that you don't have to pay interest on the entire line. Instead, you only pay interest on the money you withdraw from it. 

In other words, let’s say you’re approved for a $2,000 Line of Credit but you only need to withdraw $500 to cover an urgent appliance repair bill. You’ll only pay interest on the $500 until you’ve either repaid that amount (plus interest) or you draw more money from your credit line. 

So, what happens when you draw more money before you pay back what you borrowed? You’ll simply accrue interest on the new amount. For example, let’s say you’ve paid off $300 of that original $500 draw, so you still owe $200. But now you need to borrow $700. That brings the total borrowed amount to $900. At this point, you’ll accrue interest on the $900. 

Either way, you won’t be charged interest on the full $2,000 unless you withdraw the full amount. 

You can access money when you need it most 

Once you open a Line of Credit, it stays open. You’re free to borrow from your credit line as needed up to your predetermined limit, at which point you’ll need to wait until you’ve paid down the balance before freeing up additional funds. This means you can have immediate access to money when you need it most. 

Some lenders can even approve your application on the same day, allowing you to get the money you need quickly. 

You can enjoy financial flexibility 

Just because you have an open Line of Credit doesn't mean you have to use it. Instead, you can open it when interest rates are low and keep it open until you need to access the funds. 

This is perfect if you want to have some backup money for medical emergencies, surprise car repairs, or home repairs from inclement weather. You can essentially use it as an emergency fund. 

➢RELATED: How to Use a Line of Credit to Pay Off Debt

What to consider before you apply 

Your credit score 

While some lenders allow you to apply for and receive Lines of Credit with bad credit, many do not. If your credit score is good, you shouldn’t have any issues getting your Line of Credit. But if it’s bad, you may have a tougher time. So, you’ll need to do some research to see which lenders you’ll qualify with. 

Interest rates 

The interest rate for your personal Line of Credit can be either fixed or variable. A fixed interest rate means your interest percentage and monthly payment will be the same until the loan is paid off. Variable interest rates can fluctuate due to the market. 

If you open a credit line with a variable interest rate, be prepared for potential rate increases, which could lead to higher monthly payments. 

Repayment terms 

Familiarize yourself with the repayment terms when opening a Line of Credit. Pay attention to your payment schedule, the length of time you have to pay back what you borrow, and any fees associated with missed payments. If you don’t think you can follow the repayment schedule, you may want to consider other options. 

Can anyone get a personal Line of Credit? 

Many different types of borrowers can qualify for a Line of Credit. Even so, your credit history, income, and which lender you choose will determine your approved borrowing amount. 

For example, if you have poor credit, you may not qualify for a Line of Credit through a traditional bank or credit union. But lenders like Advance America may be able to help. 

Apply for a Line of Credit

Personal Line of Credit vs. credit card 

Although the concept of a personal Line of Credit is similar to a credit card, they have some differences. Typically, a Line of Credit: 

• May offer lower interest rates. 
• Could give you access to larger amounts of money. 
• Starts accruing interest when you draw from it. 

On the other hand, credit cards: 

• Charge extra fees for taking out a credit card cash advance. 
• Start accruing interest at the end of the billing cycle. 

Personal Line of Credit vs. personal loan 

At first glance, personal Lines of Credit and personal loans might seem like the same thing, but they differ slightly: 

• A Line of Credit gives you continuous access to funds while a personal loan gives you a one-time lump sum. 
• Interest rates apply to the entire personal loan while they only apply to the amount used on a Line of Credit (see example under the “Advantages” section above). 
• A personal loan requires you to pay the whole loan back, while a personal Line of Credit requires you to pay the outstanding balance. 

Alternatives to a personal Line of Credit 

If a Line of Credit doesn't sound like the type of financial solution you need, there are some alternatives, including: 

• Installment Loans: When you need money for unexpected costs and emergencies, an Installment Loan could be a good option. You’ll receive a lump sum quickly and pay it back in fixed amounts. 
• Payday Loans: A Payday Loan, also known as a Cash Advance, is an unsecured, short-term loan that typically gets repaid on your next payday. 
• Title loans: With a title loan, you’ll offer collateral, which is usually the title to a vehicle. If you can't repay the loan plus interest at the repayment date, the lender can keep your vehicle in exchange. 
• Pawn shop loans: If you’re in a bind and can’t qualify for any other type of financing, pawn shops can offer money in exchange for valuable items. If you can’t repay the amount borrowed by a certain date, the pawn shop keeps your collateral and resells it to cover the costs. 

How to get a personal Line of Credit 

Depending on your lender, getting a Line of Credit is a straightforward process. 

1. 1. Compare different lenders and loan options. Be sure to review each lender's interest rates, fees, terms, and conditions. 
2. 2. Gather the documents you will need to apply. Getting approved for a credit line typically requires you to provide a passport or driver's license, tax documents, paystubs, and proof of income. 
3. 3. Fill out and submit the loan application to your bank, credit union, or other financial institution. 
4. 4. Wait for your approval decision. Most approvals take minutes to one day. A HELOC typically takes the longest at a couple of weeks. 
5. 5. Once approved for your personal Line of Credit, you can access your funds! You will usually receive the funds from your first draw by the next business day following approval. 

Get a Line of Credit from Advance America today 

Advance America offers same-day financial solutions online and in-store. Our Flex Line of Credit offers competitive rates and fees, and it’s available to borrowers with all types of credit scores. But if you prefer an alternative to a personal Line of Credit, we have numerous personal loan options to choose from! 

Apply for a Line of Credit