Everyone is a little short of cash sometimes. Maybe you need to make a large purchase. You might also need to cover unforeseen expenses from an accident or health issue. Or maybe you don’t have any pressing needs right now, but you want to know that you have the resources to handle anything that comes up.
Introduction
That’s where a personal line of credit comes in. A personal line of credit can help you cover unforeseen expenses, large and small.
This article will tell you everything you need to know about personal lines of credit. We’ll explain what they are. We’ll also go over some of the different types of personal lines of credit. Finally, we’ll compare a personal line of credit to a personal loan and tell you how to get the best rates on a personal line of credit.
What is a Personal Line of Credit?
A personal line of credit is a financial product. It’s half credit card and half personal loan. That gives people the flexibility they need. You can use your personal line of credit to pay for anything.
A personal line of credit woks by giving you a set amount of money you can draw on. It’s different from personal loans and credit cards. A line of credit can be structured in different ways. For example, some banks give a personal line of credit with a draw period. That means you have a set amount of time to spend money out of the line of credit. Payments don’t start until the draw time has ended.
Other companies have personal lines of credit that work like a credit card. You make a minimum payment on the balance each month until it’s gone. For these types of lines of credit, you start paying a monthly payment right away.
Secured Personal Credit vs Unsecured Personal Credit
There are two primary types of personal credit. Secured personal credit and unsecured personal credit. For consumers, an unsecured line of credit is the best choice.
The difference between them is whether or not you have collateral to cover your line of credit. An unsecured line of credit doesn’t require any collateral. A secured line of credit requires some kind of collateral to hold in security against the credit.
That means if you’re offered a secured line of credit, you’ll have to put up some kind of asset as collateral. That asset could be anything. Banks will accept vehicles, homes, jewelry, bonds, stocks, and other property.
An unsecured line of credit means you don’t have to put up any collateral. Instead, you’re offered the line of credit. The bank trusts that you’ll pay it back.
Unsecured lines of credit usually have slightly higher interest rates than secured lines of credit. That’s because the credit doesn’t have any collateral to secure it. As a result, the lender is taking more risk. That means they need to make more money to justify the risk. This results in a higher interest rate.
We’ll talk more about credit scores and personal lines of credit in a later section. Right now, you just need to know that it’s hard to get an unsecured line of credit without an excellent credit score.
How do I get a Personal Line of Credit?
You get a personal line of credit the same way you’d get a loan or other financial product. You find a lender and apply for a line of credit. The lender will make a decision based on your credit score and other factors. Once they’ve reviewed the application and made a decision, they’ll let you know what kind of deals they can offer you.
You need a good credit score to get a personal line of credit. Most banks only offer them to “prime” borrowers. That usually means a credit score of 680 or higher. However, every situation is different. That’s why it’s best to shop around and see what kind of offers you can get if you’re looking for a personal line of credit.
If you want to increase the chances that you’ll be approved, you need to be aware of your credit score. That means monitoring it closely to ensure it’s high enough to get a line of credit. If your score is too low, then you might attempt credit repair to improve it.
What are the Benefits of a Personal Line of Credit?
A personal line of credit’s primary benefit is flexibility. You can use the line of credit like a loan. However, you only make payments on what you spend. That’s different from a loan. When you take out a loan, you’re given the full amount all at once. You then need to pay back that full amount.
The flexibility offered by a personal line of credit makes it extremely useful for many different kinds of people.
For example, if you work as a consultant or freelance, you can use a personal line of credit to cover your bills when you’re in between projects or waiting to be paid. Then, when you get paid, you can pay off the credit you used.
Personal lines of credit are also helpful for people who have a large expense coming up, but don’t know the exact cost. One example of this is home renovation. You might plan a budget for your home renovations, but you won’t know the final cost until everything’s done.
You can also use a personal line of credit as a source of emergency funds. That way you’ll have the money on hand you need to cover life’s various obstacles.
Line of Credit vs Personal Loan
Lines of credit and personal loans are very similar products. However, there are some important differences. The biggest difference is how disbursement and repayment work.
When you take out a loan, you receive the full amount all at once. That means you’ll start making payments right away. Also, you can’t change the amount of your loan. If you need more money, then you have to apply for a loan again. If the loan is too big, you still have to make payments on the full balance.
This is a huge difference for many people. If you’re facing medical bills, you don’t want to have to go through the trouble of applying for a new loan should you exhaust your funds. You also don’t want to take out a loan that’s bigger than you need.
Some people think that taking out a larger-than-needed loan isn’t a big deal. However, this loan shows up on your credit report. It also affects your debt to income ratio. Moreover, some loans have a penalty for early repayment. That means you can’t just give the money back to the lender without incurring steep fees.
However, there are situations where you want a personal loan instead of a line of credit. These situations include any time you know how much you’ll be spending. Taking out a line of credit when you know you’re going to spend a fixed amount maxes your credit utilization. That hurts your credit score. As a result, future loans and financial products will be more expensive for you.
Another difference is the collateral. Some banks are more willing to offer an unsecured personal loan than they are an unsecured line of credit. That’s because the flexibility of a line of credit makes it harder for the bank to balance the books on their end.
Finally, a personal loan is a better option if you’ve had problems with spending discipline in the past. There’s no limit on what you can use your line of credit for. That means you might start treating it as free money. That’s especially true if you don’t have to make payments until after the draw period. If you don’t have the financial discipline to avoid impulsive spending, then a personal loan is a better option for you.
Alternatives to Personal Lines of Credit
There are some options if you need a line of credit but can’t or don’t want to qualify for a personal line of credit. One of the most common options is a HELOC, or home equity line of credit.
This type of product is secured by the equity in your home. Essentially, you’re re-mortgaging your home. However, instead of getting the all the money up front, it comes in the form of a credit line. Many people use this option to make home renovations or improvements. It gives them the spending flexibility they need without incurring the higher interest rates you’d get from an unsecured line of credit.
Getting the Best Personal Line of Credit Rates
Now that you understand personal lines of credit, it’s time to cover some ways to make sure you get the best rates. The better your interest rates, the cheaper it is for you to use your line of credit. A difference of even a few points can add up to tens of thousands of dollars over the course of your credit line.
Get a Line of Personal Credit Before You Need It
If you want to get a personal line of credit, then there are a few things you should do to get the best rates. Good rates on a personal line of credit are reserved for people with the highest credit scores. Therefore, you want to make sure you’re getting your line of credit when your finances are at their healthiest.
For example, many people look to a personal line of credit to cover unforeseen medical expenses which is also called medical financing. However, if the medical expenses are already building, then your income, savings, and credit score have probably taken a hit.
That means that the best time to get a personal line of credit is before you need it. Some personal lines of credit have an annual fee, whether you’re using them or not. However, this fee is much lower than the repayments you’d be making on a loan. It’s also usually worth the peace of mind knowing that you’re covered in case the worst happens.
Stay on Top of Your Credit Score
The next step to getting the best rates on a personal line of credit is to stay on top of your credit score. That means constantly checking to ensure there’s no negative or harmful information on your credit report.
Also, you need to demonstrate that you use credit responsibly. It’s best if you can show that you’re not carrying any balances from month to month. That means your credit utilization is low. As a result, lenders and banks can tell you’re not a high-risk investment.
Check with Your Current Bank
Finally, the first place to look for a line of credit should always be your current bank. Many banks offer discounts and preferential rates if you get a line of credit from them and also use them for your checking, savings, or stock accounts. For example, Well’s Fargo recently offered a 1 point discount on lines of credit if you already used them for your checking account.
That doesn’t mean you shouldn’t shop around. Sometimes banks and lenders will compete for your business. If that’s happening, then you stand to gain. This competition lowers the price of products for you, making a personal line of credit even cheaper.
As you can see, a personal line of credit is a useful and important financial product. It offers the flexibility of a credit card without the high interest rates. It also offers the access to resources you’d get from a loan, without locking you in to a set amount.
No matter why you need a personal line of credit, make sure you’re getting the best deal. You can use a personal loan payment calculator to price different companies. You can also use our site and other tools to shop around for the best offer. After all, the more you pay for financial products, the less value you actually get out of them.
If you need access to cash, but don’t want to take out a loan or credit card, a personal line of credit may be the answer you’re looking for. Shop around and see what your options are. Use your personal line of credit to have the money you need when you need it.
FAQ
The Basics
A personal line of credit is a great option to consider when it comes to borrowing money. Many people overlook this option, but it has many advantages when compared to a traditional loan. Credit lines are similar to credit cards, but they have a much lower interest rate, and there is no penalty for withdrawing cash.
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What is a personal line of credit?
How does a personal line of credit work?
What's easier to get - personal loan or line of credit?
How to use personal line of credit?
Is a personal line of credit a good idea?
It may depend on your personal financial situation but some people consider this the best way to borrow money. If you can get a variable interest rate that is reasonable, and lower than most fixed rates, then getting a personal line of credit is probably a good idea. It’s also better than a loan, because you can borrow only the amount you need.
How does a personal line of credit affect credit score?
What is a personal line of credit loan?
A personal line of credit is like a personal loan, except you don’t get the money in one lump sum. You have access to a specified amount of cash, and you can borrow as much as you need (below the approved limit) at any time. You then repay what you borrowed in monthly installments at a variable interest rate. Also check out more info on guaranteed personal loans.
What is needed for a personal line of credit?
What is a personal signature line of credit?
A personal signature line of credit is an unsecured credit line that is revolving – the line of credit will not expire, so you can continue to use it as long as you remain current on your monthly payments. A signature line of credit is typically reserved for those with excellent credit scores. Compare this to a personal signature loan to see what's a better fit for your situation.
What is the difference between residential loan verses personal credit line?
Should I get a personal line of credit?
How to Get a Personal Line of Credit
Getting approved for a personal line of credit is just as easy as applying for a personal loan. There’s a relatively quick and easy loans application process, and you’ll typically have an answer in less than 48 hours. Most financial organizations have online loans same day applications, so you don’t even need to leave your house.
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How to obtain personal line of credit?
What is a personal line of credit from a bank?
A personal line of credit is a specific amount of cash allotted to you by a bank or other financial institution. You get approved up to a certain amount, and then you can borrow as much or as little as you need over time. You’ll repay the amount you borrow in monthly installments. Be advised that there is no longer a Chase personal loan or line of credit product according to various online sources.
Where can I get a personal line of credit?
You can get a personal line of credit at any bank or financial institution. You can also check online for offers from p2p loan sites, and other electronic options. Be sure to check the interest rate and the terms of the credit line before you complete an application.
Does Bank of America offer personal lines of credit?
How to apply for a personal line of credit?
How do I get a personal line of credit?
How to use personal line of credit at Wells Fargo?
Wells Fargo offers both traditional loans and personal lines of credit. You can apply on their website or go into a physical location to begin the application process. Before you begin, you should review the terms, interest rates, and qualifications to be approved for a Wells Fargo personal loan.
How to qualify for a personal line of credit?
Each bank or financial organization has their own eligibility requirements for personal lines of credit. In most cases, you’ll need a credit score of at least 700. You’ll also need a debt-to-income ratio of around 30-40%. Some places offer lines of credit specifically for home improvements and other purchases, so you’ll want to check that out as well. If you have all the right qualifications then some places offer instant approval loans.
Does Ally bank have personal lines of credit?
Not currently. Ally bank does not offer personal lines of credit. They only offer loans for home and auto financing. Ally does have some options similar to a personal line of credit, but it’s more like a credit card, so the interest rate may by higher than one on a line of credit.
What credit score for Key Bank personal line of credit?
There is no specific credit score listed as a qualification for a personal line of credit at Key Bank; however, you’ll probably need to be in the 700 range to get a reasonable interest rate. It may also depend on your income, and the city and state you live in. If your score is bad then you may need to consider personal loans bad credit options.
How to get approved for a personal line of credit?
You simply go through the relatively painless application, which you can do online or in a physical location. Most applicants will get a response in less than 48 hours, so you won’t have to wait long. If your score is low you can look at easy approval installment loans for bad credit.
Who has the best rates for personal line of credit?
Is it hard to get a personal line of credit?
Important Details
Borrowing money is always a little scary, so it’s good to have all the pertinent details up front. Even if you are applying online, you’ll have access to a financial advisor, and you should ask them any and all questions you may have. It’s best to know what you’re getting into, before you get into it.
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Does personal line of credit affect credit score?
Opening up any new account may affect your credit score; however, as long as your debt-to-income ratio is below about 50%, then getting a personal line of credit should not significantly impact your credit score. If you make your monthly payments on-time, then you shouldn’t be too concerned about a negative effect on your credit score. Remember there are also fair credit personal loans if you don't qualify for a line of credit.
Is a personal line of credit tax deductible?
What is an unsecured personal line of credit?
An unsecured personal line of credit is one that is not secured with collateral, such as your house or your personal vehicle. Unsecured personal lines of credit will have higher interest rates than a secured credit line, because there is more risk for the lender. Be sure to compare more unsecured loans for bad credit.
How much personal line of credit can I get?
The amount of credit you will be approved for depends on your credit score, your income, and your debt-to-income ratio. The great think about a line of credit is, you can borrow just what you need, which makes it easier to manage the monthly installments for repayment. Read more: Where can I get a loan with bad credit?
Which is better line of credit or personal loan?
How long can we keep personal line of credit open?
Can you increase a personal line of credit?
How many lines of credit should a person have?
What is a good personal line of credit?
Is a personal line of credit a marital asset?
Can you claim personal line of credit interest on taxes?
How to calculate personal line of credit payment?
How does a CIBC personal line of credit work?
Can you refinance a personal line of credit?
Where do credit lines fall on personal financial statements?
Does overdraft line of credit cover personal checks?
How to calculate interest on a personal line of credit?
Does opening a personal credit line hurt your credit score?
Opening a personal line of credit may slightly affect your credit score because it will reflect a new account being opened; but it may actually improve your credit score, because the amount of credit you have available to you will increase. If your score is already low then you may have to go with installment loans no credit check options for now but that doesn't mean that's only option. Peer to peer loans can be another option.
How to close a personal line of credit?
How does personal line of credit payment work?
Do personal lines of credit interest rates fixed?
How does interest work on a personal line of credit?
When is a personal line of credit not recommended?
Christine has a solid background in personal finance as she spent the last eight years working at one of the biggest banks in the US. She managed her own team of financial advisors that helped hundreds of people with their financing needs. Her innate understanding of different financial products and loans helped her move up the ranks quickly after graduating with a degree in Business Administration.