What is a Personal Line of Credit?
Q: I need access to an indefinite amount of funds for expenses, so I’m thinking of taking out a personal line of credit. What is the difference between this product and a personal loan or a credit card?
A: Personal lines of credit can be a great way to access necessary funds for covering various expenses, with minimal hassle and easy payback terms. Let’s take a look at how this loan product differs from traditional personal loans and credit cards, as well as why it can be a fantastic option.
What’s a personal line of credit?
A personal line of credit (PLOC) is a form of revolving credit up to a specified amount that works much like a credit card. The borrower can use the money as needed until the maximum allowable credit line (aka “limit”) is used. As the borrower makes monthly payments toward the balance, the available credit is updated to reflect the principal balance that has been repaid.
A PLOC has two phases: the draw period and the repayment period. During the draw period, which typically lasts two years, the borrower can take out as much money as needed from the available credit line. Once the formal repayment period begins, the borrower can no longer take out cash from the credit line. It should be noted that the borrower does not have to wait for the repayment period to commence; they can typically begin repaying the used line as soon as they start drawing.
How is a personal line of credit different from a personal loan?
Unlike a PLOC, a personal loan provides the borrower with a lump sum of money that is generally used immediately for a specific purpose. Personal loans usually feature a fixed interest rate and a fixed payment amount throughout the term. You’ll make consistent payments toward the loan’s interest and principal throughout the life of the loan.
How is a personal line of credit different from a credit card?
As a form of revolving credit, a PLOC is similar to a credit card. Both are unsecured and can feature high-interest rates, which will probably be adjustable rather than fixed. However, a PLOC generally has a lower interest rate than a consumer credit card. It also has a limited draw term, unlike a credit card, which can be open for years.
When is it a good idea to choose a personal line of credit?
While a personal loan can provide the freedom to use the money you borrow as needed and a fixed repayment plan, a PLOC can be a great flexible borrowing option in many circumstances, such as a home improvement project or any other ongoing purpose for which the borrower does not know exact costs. It can also be a good way for a borrower with fluctuating income to get through the tighter months. Finally, it can be used to pay for a major life event, such as a wedding or adoption, for which the borrower does not have an exact price tag, but for which they will be planning over the course of many months.
A PLOC offers the borrower many benefits, including:
- Flexible borrowing of funds spread out over many months
- Instant access to funds when needed
- No repayments unless the funds are used
Before you take out a PLOC
Before going ahead with your application for a PLOC, make sure you understand the exact terms and conditions associated with your line of credit. You should be clear on when your draw period ends and you’ll no longer be able to access your funds, whether there is a cap on your interest rate, and the maximum amount of funds you’ll be able to use from your line of credit. A PLOC can be an excellent way to access a large amount of funds with manageable payback terms. Learn more about our PLOC.