What Is a Personal Line of Credit? How It Works and When To Use One

A personal line of credit is a borrowing option that lets you access funds up to a specified amount rather than receiving a lump sum up front. Compared to installment loans, personal lines of credit offer more flexibility, since you’ll only repay the amount of money you decide to use during the draw period. You can also borrow up to your credit limit repeatedly after you repay.

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How a Personal Line of Credit Works

A personal line of credit, sometimes also called a credit line, is a type of loan that gives you access to a set amount of money upon approval, usually via a deposit to your bank account or with a credit card issued by the bank. 

You can borrow money up to your preapproved amount over a period of time known as the draw period, which can range from five to 10 years, and you can repay the amount borrowed and borrow money as many times as you like as long as you stay below the preset credit limit. Once the draw period ends, you'll need to pay off the remaining balance.

Key Features of a Personal Line of Credit

Personal lines of credit are different from personal loans and other borrowing options, with the following key features:

• Revolving line of credit you can borrow against, not a lump sum

• You only pay interest on the money you use

• Once you repay the money you borrow, you can borrow again up to your credit limit

• Usually come with variable interest rates

• Can be secured (requiring collateral), but are usually unsecured

How a Personal Line of Credit Works

How To Borrow and Repay a Personal Line of Credit

When you apply for a personal line of credit and get approved, the bank or credit union will give you access to a credit line with a set limit based on your credit and income. Then, you’ll be able to draw funds up to that specified limit and use them as needed. Depending on your needs and the length of your draw period, you can borrow money and repay it, then repeat the cycle again, multiple times. You’ll accrue interest, but only on the amount you borrow, not on the entire credit line you can borrow against. 

During the draw period, you’ll need to make minimum monthly payments based on the amount of money you borrow. Depending on the lender, the minimum payment during the draw period can be interest-only or can include both interest fees and a small percentage of the money you borrowed — this is the principal. But once the draw period ends, you’ll enter the repayment period, which can last as long as 10 years. By the end of the repayment period, you’ll need to pay off the entire remaining balance.

Personal Line of Credit: An Example

Say that you apply for a personal line of credit because you need to pay for some urgent home renovations.

You get approved for a credit line of $10,000, but you ultimately only need to borrow $2,000.

You’ll pay interest on the $2,000 you borrow, and if you repay the $2,000 several months later, you’ll have freed up your entire credit line and can borrow up to $10,000 again.

A note on interest: Most personal lines of credit come with variable interest rates, meaning they can change throughout the draw period. This means that your exact minimum payment amounts can be unpredictable, so you’ll want to plan your budget accordingly.

Personal Line of Credit vs. Other Borrowing Options

Here's how personal lines of credit compare to another popular borrowing option: personal loans.

When a personal line of credit makes more sense: You don't know exactly how much you need to borrow and you want more flexibility.

When a personal loan makes more sense: You know precisely how much money you need, you want the predictability of fixed interest rates and monthly payments that don’t change over time.

Line of Credit vs. Credit Cards

Credit cards are another borrowing alternative to personal lines of credit, and while they have some similarities, including a revolving credit line that you can reuse after repaying your balance, there are some key differences as well. Personal lines of credit typically have lower rates and higher credit limits, but you don’t earn rewards on your spending like you can with many credit cards.

When a personal line of credit makes more sense: You need a higher credit limit and want lower interest rates.

When a credit card makes more sense: You want to earn rewards. You don't need to carry a balance from month to month so you’ll avoid paying interest.

When a Personal Line of Credit Makes Sense

• Mid-range borrowing needs

• Ongoing or unpredictable expenses

When a Personal Line of Credit Makes Sense — and When It Doesn't

When a Personal Line of Credit Is a Good Fit

Here are some situations where a personal line of credit can be a particularly good option:

• You have ongoing expenses such as a home renovation project or medical bills, and you don't know exactly how much you need to borrow.

• You're looking for access to a credit line to help smooth over some gaps in your cash flow or income.

• Your priority is flexibility rather than fixed payments.

When a Personal Line of Credit May Not Be the Best Option

On the other hand, a personal line may not make the most sense if:

• You prefer predictable payments and a clear payoff timeline.

• You struggle with overspending and only want access to the exact amount you need to borrow.

• You want to avoid the possibility of interest rates increasing.

Pros and Cons at a Glance

Here’s a quick look at the major pros and cons of personal lines of credit.

Pros:

• Flexibility to borrow as much or as little as you need up to your credit limit

• You’ll only pay interest on the money you use, not a lump sum

• Credit line is reusable once you repay

Cons:

• Variable interest rates can increase

• Can cause temptation to overspend, since you may get access to more credit than you need

• Harder to budget for, since your payments will depend on how much credit you use and how interest rates fluctuate

What To Expect From a Personal Line of Credit

How To Qualify for a Personal Line of Credit

The exact credit score you’ll need to qualify for a personal line of credit varies by lender, but you typically need a score in the good range at a minimum, meaning a score of roughly 670 or higher.

The credit union or bank will also want to confirm that you have a steady income so you can reliably repay the money you borrow, and they'll look at your level of existing debt when evaluating your application.

Interest Rates and Fees for a Personal Line of Credit

As with most types of loans, the interest rate you'll pay with a personal line of credit depends on your credit score, with higher scores usually qualifying for lower rates.

Most personal lines of credit have variable interest rates, meaning the interest rate you pay can fluctuate over time. How often the rate changes depends on the lender, but it can change monthly or more frequently based on changes to the prime rate, the benchmark interest rate set by individual banks, typically in line with the federal funds rate.

On top of interest charged on the amount of money you ultimately use, personal lines of credit may charge a few other fees. An annual fee is the most common, and can range from $0 to $50 depending on the lender. Some banks and credit unions also charge draw fees when you access funds, as well as late payment fees.

Secured vs. Unsecured Lines of Credit

Most personal lines of credit are unsecured, which means you get access to a credit line without having to provide collateral. It's not as common, but some personal lines of credit are secured, meaning you need to put up an asset such as a savings account or certificate of deposit that the bank can claim if you don’t repay the money you borrow. 

The advantage of a secured personal line of credit is that you may qualify for a lower interest rate, since the bank is taking on less risk to lend you money. Secured loans such as these can also be a more accessible option for those with lower credit scores.

A lender's website will typically outline whether they offer secured or unsecured options and what the requirements are.

FAQs

Is a personal line of credit good for emergencies?

A personal line of credit can be useful for emergencies, such as unexpected car repairs or a sudden medical expense. You can borrow up to a preset credit limit, and if you pay off the amount you borrow, you can reuse that available credit as needed.

Does using a personal line of credit affect your credit score?

When you apply for a personal line of credit, your credit score can drop by a few points due to the hard credit inquiry the lender will pull to evaluate your application. Beyond that, a personal line of credit can impact your credit score through potential changes to your overall credit utilization ratio and your payment history. To minimize any negative impact to your credit, stay on top of your repayment schedule. Staying on top of your payments can have the extra benefit of improving your credit score in the long run, too.

Can you pay off a personal line of credit early?

You can generally pay off a personal line of credit early, and most lenders let you do so without an early repayment fee. If you have the room in your budget to repay the loan early, it could be worth it to save money on interest charges.

How is interest calculated on a line of credit?

Interest for a line of credit will be calculated based on your current balance. The specific formula varies by lender, but usually it involves taking the current annual interest rate and dividing it by 365 to get the daily rate. For each payment period, the lender will add up each daily interest charge to arrive at a monthly amount.

Is it hard to get approved for a personal line of credit?

Personal lines of credit can be harder to get approved for than other borrowing options, as they often require a good credit score. However, a secured personal line of credit backed by collateral can be more accessible if your score is lower.

Sources:

• Consumer Financial Protection Bureau (CFPB). "What is a Personal Line of Credit?"

• A+ Federal Credit Union. "Personal Line Of Credit Versus Personal Loan: Which Is Better?"

• U.S. Bank. "Pros and cons of a personal line of credit: Here's what you should know."

• Citi^{®. "}What is a personal line of credit?"

• CFPB. "How much can I borrow with a Personal Line of Credit?"