The biggest advantage of a personal line of credit is its flexibility. Unlike a personal loan and other financing options where you receive a lump sum of money upfront, a line of credit lets you withdraw funds as much — or as little — as you'd like.
The main advantage of an LOC is the ability to borrow only the amount needed and avoid paying interest on a large loan. That said, borrowers need to be aware of potential problems when taking out an LOC. Unsecured LOCs have higher interest rates and credit requirements than those secured by collateral.
Lines of credit can be a great tool to use for emergency situations if your bank account isn't quite the same amount of the money you may need. Lines of credit could be useful for unexpected expenses, like a costly house repair, or large renovation but lines of credit often aren't the best solution for car purchases.
Higher interest rates: Because personal lines of credit are typically unsecured loans, they may come with higher interest rates. Typically, a personal line of credit has a variable interest rate, which means it's difficult to determine exactly how much interest you'll end up paying.
A long-standing personal line of credit adds to your length of credit history. However, a new line shortens your overall history of accounts as will closing a personal line of credit. A shorter credit history may lower your credit score.
By and large, lines of credit are not intended to be used to fund one-time purchases such as houses or cars—which is what mortgages and auto loans are for, respectively—though lines of credit can be used to acquire items for which a bank might not normally underwrite a loan.
The greater the value of your home and/or the loan-to-value requirements of the lender, the greater the line of credit you can obtain. For example, a lender willing to consider a CLTV of 90 percent will offer a credit line amount that - added to any other mortgage debt - equals 90 percent of the home's appraisal value.
Personal lines of credit have fixed durations, which encompass two distinct phases, each typically lasting three to five years: Draw period: During the initial draw period, you can freely borrow and repay money against your credit line.
Credit terms and limits
While terms vary by lender, the APR on a line of credit is often lower than the APR for credit cards. And the credit limit for a line of credit may be higher than for a credit card. These advantages may make credit lines better suited to large purchases that you intend to pay off over time.
You can repay the principal at your convenience, but each month you must make the minimum payment set out in your monthly statement. This payment includes interest, insurance premiums (if applicable) and any additional amounts required to ensure your account balance does not exceed your credit limit.
You can withdraw funds of any amount within your limit and you only pay for the amount you have withdrawn plus interest.
Unlike a personal loan, there is no set schedule to repay the money you borrow from a line of credit. However, you must make monthly interest payments on any amount you borrow, as interest begins to accrue from the very first day you borrow the money until the day you pay it back.
If you draw a high percentage of the amount borrowed — taking $9,000 of the $10,000 available, for example — your credit usage will hurt your credit score. Likewise, taking below 30% of your draw is considered good use, boosting your score.
A personal loan gives you a lump sum of money upfront and requires fixed monthly payments throughout your loan term. On the other hand, a personal line of credit lets you withdraw as much cash as you need at any point in time and pay it back on your own timeline with a variable interest rate.
Loan payment example: on a $50,000 loan for 120 months at 6.10% interest rate, monthly payments would be $557.62.
The monthly payment on a $50,000 loan ranges from $683 to $5,023, depending on the APR and how long the loan lasts. For example, if you take out a $50,000 loan for one year with an APR of 36%, your monthly payment will be $5,023.
THUMBS UP = A $1,000 credit limit means you're using 30% THUMBS DOWN = A $500 credit limit means you're using 60% It's always a good idea to keep your credit card balance as low as possible in relation to your credit limit. Of course, paying your balance in full each month is the best practice.
A good guideline is the 30% rule: Use no more than 30% of your credit limit to keep your debt-to-credit ratio strong. Staying under 10% is even better. In a real-life budget, the 30% rule works like this: If you have a card with a $1,000 credit limit, it's best not to have more than a $300 balance at any time.
A high-limit credit card typically comes with a credit line between $5,000 to $10,000 (and some even go beyond $10,000). You're more likely to have a higher credit limit if you have good or excellent credit.
You will likely need a credit score of 640 or higher to get approved for a $10,000 personal loan. Most lenders that offer personal loans of $10,000 or more require fair credit or better for approval, along with enough income to afford the monthly payments.
You will likely need a credit score of at least 580 for a $3,000 personal loan. Most lenders that offer personal loans of $3,000 or more require bad credit or better for approval, along with enough income to afford the monthly payments.