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

A personal line of credit is a flexible loan option where you an borrow funds. You repay and use more credit as needed, and only pay interest on what you use.

Key Takeaways

• A personal line of credit is a borrowing limit you can tap as needed during a draw period of five to 10 years. You only pay interest on what you actually use, not the full credit line.

• Lines of credit work best when your expenses are ongoing or unpredictable — think home renovations or medical bills. Personal loans fit better when you need a lump sum with fixed payments, while credit cards win if you want rewards.

• Check your credit score before applying since most lenders want 670 or higher. If your score is lower, consider a secured line of credit backed by collateral to improve your approval odds and snag a lower rate.

Summary generated by AI, verified by MoneyLion editors

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

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:

• Type: Revolving credit — you can borrow, repay and reuse

• Loan amount: Typically $1,000 to $50,000

• Interest: Pay interest only on what you borrow

• APR: Usually variable and may change over time

• Access: Draw funds as needed instead of getting a lump sum

• Repayment: Reuse your limit as you pay it down

• Secured vs. unsecured: Usually unsecured, but secured options exist

• Common fees: May include annual, draw or late fees

How a Personal Line of Credit Works

How To Borrow and Repay a Personal Line of Credit

1. Apply for a personal line of credit and get approved.

2. The bank or credit union will give you access to a credit line with a set limit based on your credit and income.

3. You'll then be able to draw funds up to that specified limit and use them as needed.

4. Depending on your needs and the length of your draw period, you can borrow money and repay it.

5. You can then repeat the cycle again, multiple times.

6. 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:

• Make mminimum payments: Make minimum monthly payments based on the amount of money you borrow

• Interest-only payments: The minimum payment during the draw period can be interest-only

• Principal payments: Your payments cna include both interest fees and a small percentage of the money you borrowed.

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.

• Approved for: $10,000

• Borrowing amount: $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

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

• 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

• 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 of a Personal Line of Credit

What To Expect From a Personal Line of Credit

How To Qualify for a Personal Line of Credit

You typically need a score in the good range, roughly 670 or higher. Though, the exact credit score you'll need to qualify for a personal line of credit varies by lender.

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

The interest you'll pay on a personal line of credit depends on your credit score, income and overall finances. The higher your score, the better you'll qualify for a lower rate.

How the interest works:

• Variable APR: Based on the prime rate as well as the benchmark set by the lemder

• Rate changes: Depends on the lender or whenever the prime rate changes

• Interest charges: You only pay interest on what you borrow. There's no grace period, so interest begins accruing immediately.

Here's an example: You need to borrow $2,000 and have an APR of 14%. The monthly interest you'll pay is around $23. If the prime rate increases, so will your monthly cost.

Fees to watch for:

• Annual fee: $0 to $50

• Draw fee: Some banks and credit unions may charge draw fees when you access funds

• Late fees: Depends on the lender

• Other fees: Some lenders may choose other account maintenance 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?

Yes, 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?

Yes, 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 review your application.

Beyond that, however, 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?

Yes, 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.

Key Terms

• Personal line of credit: A revolving credit account that lets you borrow up to a set limit, repay what you use and borrow again during the draw period.

• Revolving credit: Credit you can use, repay and reuse without reapplying, as long as you stay within your approved credit limit.

• Draw period: The time when you can borrow from your credit line, make payments and reuse available credit as you pay down your balance.

• Variable APR: An annual percentage rate that can change over time, so your borrowing costs and payments may go up or down.

• Credit utilization ratio: The share of your available revolving credit you're using. A higher ratio can hurt your credit score.

Sources:

• Consumer Financial Protection Bureau: What is the difference between a fixed APR and a variable APR?

• myFICO: What Should My Credit Utilization Ratio Be?

• 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?

Summary generated by AI, verified by MoneyLion editors

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?"