Personal Line of Credit: Unlocking Financial Flexibility

You may need fast access to cash when unexpected expenses arise. A personal line of credit for bad credit can help when surprises shake up your funds.

A personal line of credit works like a backup source you can access. You only pay interest on what you use. It’s not a free pass to money, but it can give you a break from financial troubles. When used wisely, a personal line of credit can save you behind when you need a little extra. Let’s find out how it works.

What is a Personal Line of Credit?

A personal line of credit is a backup stash of cash you can tap into when needed. The bank sets aside a certain amount of money just for you, and you can borrow from that pool up to a credit limit they give you. You only pay interest on what you use, not the whole limit.

The advantage is that it’s revolving, so when you repay what you borrowed, that money becomes available again if you need it later, just like a credit card. Let’s say you take out $500 and pay it back. If something else came up, you could then borrow another $500. 

It’s crucial to remember that a line of credit isn’t the same as a personal loan. With a loan, you’d get one lump sum upfront and repay it in fixed monthly payments over time. But with a line of credit, you can access funds as needed to cover unexpected expenses or manage fluctuating costs.

How Does a Personal Line of Credit Work?

According to the Consumer Financial Protection Bureau explanation, people use personal lines of credit (PLOCs) by writing special checks or asking to move money to their checking accounts. The bank or credit union then sends them a bill each month. Borrowers must make at least the minimum monthly payment for their borrowings.

Of course, the bank still charges you interest on what you borrow, but gives you more flexibility. Let’s take a closer look at a personal line of credit features.

Draw Period and Repayment Period

When the line of credit is available, it’s called the draw period. Borrowers can access money up to the approved limit as needed. The loan purpose is flexible; you can use the funds for surprise bills, purchases, or budget balancing. You only pay interest on what you borrow.

The draw period is usually 2 to 7 years. During that time, you have three options: make minimum monthly payments, pay it off, or pay a bit more than the minimum to reduce the interest you’ll have to settle in the future.

When you reach your repayment period, you won’t be allowed to borrow. This means it is the time for you to start repaying the outstanding debt amount.

Accessing Funds

Many lenders will give people who take out a personal line of credit some checks tied to the checking account. You can use these checks like regular ones to write to yourself or others to withdraw money. You can also specify the amount you want and ask your bank to transfer it to your other checking account.

Some places also give out debit cards for the line of credit that work similarly to a credit card. You can use it at stores or withdraw cash from the ATM, making it easy to get the money when needed for everyday expenses or if something comes up.

Minimum Payments and Interest

When you take money from a personal line of credit, interest starts building up immediately on what you owe. The interest rate, which the lender decides based on your credit, applies daily to your outstanding balance. The longer you carry a debt, the more interest you’ll owe.

Pros and Cons of a Personal Line of Credit

Personal lines of credit are handy for getting money when needed, but they may carry some risks. To approach them responsibly, you should weigh the pros and cons.

Pros	Cons
Flexible access to funds. You will access your money exactly when needed without waiting days or weeks for credit approval.	Good credit is required to qualify. You will need a credit score of at least 680 to get a personal line of credit.
Relatively lower interest rates (compared to other options). The interest ranges between 5% and 25%.	Personal line of credit rates are variable. The interest can fluctuate depending on the economic situation or other changes.
No collateral is required. Usually, there is no need to provide a pledge to secure the money you borrow.	Potential fees. There can be additional fees, such as application and foreign transaction fee or annual fee.
It can be used for various purposes. There is no limit on how you can spend the cash. Do it to cover the unplanned expenses or just pay for basic needs, like car gas, or groceries.	Risk of overspending. If you don’t have a set repayment plan, it could lead to over-borrowing.
Potential for overdraft protection (depending on the lender). You can avoid overdraft fees or other penalties.	No open-end option. A PLOC is usually not open-ended and requires reapplying at the end of the draw period.

Personal Line of Credit vs. Other Financing Options

Personal lines of credit are handy for borrowing money in flexible ways. Still, you should consider how they compare to other choices before deciding.

Personal Line of Credit vs Personal Loan

The difference between a personal line of credit vs. personal loan may seem thin. They are both ways people can borrow money for their individual needs, but they work differently. With a personal loan, you get a lump sum of cash upfront and pay it back in fixed installments over a set period. The interest payments stay the same and apply to the entire amount you borrow.

Unlike a personal loan, instant approval personal line of credit works more like a credit card. You’re approved for a maximum limit, but you can borrow as much as you need up to that sum, then pay it back and reuse the credit later. This flexibility makes the personal line of credit suitable for managing fluctuating expenses. However, the PLOC’s interest rate might change depending on the market.

PLOC vs Credit Card

Personal credit lines and credit cards provide flexible borrowing choices but have distinct advantages. Personal lines of credit typically offer more versatile repayment terms than credit cards. For both options, borrowers can frequently decide to make interest-only payments or pay a portion of the principal balance each month. Credit cards may also have a 0% APR period, allowing you to repay the debt without being charged any interest during the billing cycle.

Unlike credit cards, personal lines of credit commonly have higher credit limits. They also apply daily interest rates and have no interest-free periods. These options can be valuable for borrowers who need access to more funds for progressing costs or unexpected emergencies.

PLOC vs HELOC (Home Equity Line of Credit)

A home equity line of credit, or HELOC for short, lets homeowners take out a loan using the value of their house as collateral. It’s a way to get cash based on the cost of your house minus the amount you still owe the bank or credit union for your mortgage.

Since your house is a security for a lender, a HELOC tends to have lower interest rates than personal loans or credit cards. But HELOCs come with serious risks, too. If you miss payments, the lender can foreclose your property. HELOCs seem attractive because of the low rate. Still, you should weigh that against possibly losing your home if something goes south with your finances.

PLOC vs Payday Loan

Payday loans carry high-interest rates that could reach 400%. Unlike personal lines of credit, these loans have short repayment terms. You must pay back the total amount, including all the loan fees and interest, by your next paycheck. That’s a tight squeeze if you’re short on cash.

Personal lines of credit tend to have lower rates and longer payback times. Another difference lies in their repayment. Instead of paying back the whole amount in 2 to 4 weeks, you can make only minimum payments on a monthly basis.

PLOC vs Installment Loan

Interest rates on installment loans can be fixed or variable, depending on factors like the lender and loan type. Like personal loans, they are repaid with fixed monthly payments, and the interest is applied to the whole debt amount.

Personal lines of credit usually have variable rates. They can shift over time based on market conditions or under specific conditions outlined in your agreement. You can make the minimum monthly payment and only pay interest for what you use. 

Is a Personal Line of Credit Suitable for Me?

Whether a personal line of credit works for you depends on several factors. Here are a few vital things to help decide if it makes sense:

• What’s your credit score? It plays a huge role in qualifying for a line of credit and the terms you might get. Better scores often mean better rates and higher limits.
• What are your money goals? Consider whether a line of credit matches your goals. For instance, if you want flexibility to handle expenses or surprise costs, then it might be good.
• Can you budget for the payments using your current cash flow? Unlike installment loans, a personal line lets you keep borrowing, paying, and borrowing again up to a limit. It may lead to overspending habits and significant debts. Make sure you have a solid plan to pay back anything you borrow.

How to Get a Personal Line of Credit?

Getting a personal line of credit takes a few steps. Here’s a general breakdown of how you can do it:

1. Check your credit score to see where you stand. You can do this online (it’s free once a year with AnnualCreditReport.com) or get your credit report from one of the major credit bureaus (Equifax, Experian, or TransUnion). A decent score makes it more likely a lender will give you a personal line of credit.
2. Look at your budget. See how much money comes in and goes out each month.  Figure out what you can repay on a monthly loan after covering your other expenses and current debt.
3. Research lenders. Find banks, credit unions, or online services that offer personal lines of credit. Compare their interest rates, fees, payback timelines, and requirements to see which option best suits your situation.
4. Get your documents together. Prepare any paperwork you’ll need to apply, such as proof of income (pay stubs or tax returns), ID (driver’s license or passport), details on money or property you own, and debts you owe.
5. Apply with all your details and documents. The lender will review your credit and finances to decide whether to give you a personal line of credit. It can take from one to a few business days.
6. Check the personal loan agreement. If you get approved, look closely at the terms, rates, fees, etc. Make sure you get it before agreeing.
7. Receive the money. Once you accept, you can use the line of credit up to your limit and make timely monthly payments according to your schedule.

Bottom Line on Personal Lines of Credit

A personal line of credit can be handy for handling money surprises or funding a renovation. It lets you get money when needed, so you don’t stress as much about cash flow gaps or unexpected costs. However, careful planning is still crucial. Overspending can easily mess up your finances.

When used correctly, a personal line of credit gives you flexibility and a backup plan, bringing peace of mind. As long as you stay disciplined and don’t go overboard, this type of self-directed financing can be a good way to take control of your money situation.

Learn more:

1. What Is The Difference Between Interest Rate And APR? – https://www.badcredify.com/guides/apr-vs-interest-rate/
2. Can I Open A Bank Account With Bad Credit? – https://www.badcredify.com/guides/can-i-open-a-bank-account-with-bad-credit/
3. What Credit Score Is Needed For A Personal Loan? – https://www.badcredify.com/guides/minimum-credit-score-for-a-personal-loan/

External sources:

1. Annual Credit Report – https://www.annualcreditreport.com/
2. How to Request a Credit Limit Increase – https://www.usbank.com/financialiq/manage-your-household/establish-credit/how-to-request-a-credit-limit-increase.html 
3. Types of Credit Lines – https://www.debt.org/credit/lines/