Personal Lines of Credit: Should or Shouldn’t You?

A personal line of credit gives you flexible, revolving access to funds you can borrow, repay, and borrow again.Similar to a credit card, but a personal line of credit typically has a lower interest rate.

In this quick guide, we’ll get into what they are, how they work, the pros and cons of opening one, and how they compare to personal loans and credit cards.

What is a personal line of credit?

There are several different types of lines of credit, but overall, a line of credit is simply an arrangement between you and a financial lender (usually a bank) that establishes a predetermined borrowing limit you can tap into at any time. You can take money out as you need it until you reach your limit.

How does a personal line of credit work?

A PLOC typically works in two phases: a draw period, often lasting two to five years, and sometimes a separate repayment period. Note that some PLOCs remain open indefinitely without a fixed draw period, functioning more like a credit card.

With a personal line of credit (PLOC), the loans are open-ended with funds that can be accessed through bank transfers or line-of-credit checks. These lines of credit can be issued for limits that range from $1,000 to more than $100,000,  depending on your creditworthiness and the lender.

Interest begins accruing immediately once you withdraw the money. Like a credit card, borrowers make minimum monthly payments. The minimum repayment amount fluctuates, but can be charged as a fixed fee or percentage of the balance owed.

You can generally use the funds however you like, as long as you stay under your credit limit. That flexibility is one of the product’s biggest selling points.

When taking out a personal line of credit, pay close attention to the loan’s terms, particularly when it comes to the terms of repayment. While most personal lines of credit function like credit cards, others may have repayment terms that could be inconvenient.

Here are a few less common forms of repayment you should know about:

1. Balloon payment. A personal line of credit may require payment of the entire balance at the end of the term (known as a balloon payment). If you’re not able to repay the full amount, you’ll have to refinance.
2. Draw and repayment periods. Some personal lines of credit may feature separate draw and repayment periods. This lets you withdraw funds only during the draw period while requiring you to make monthly payments during the repayment period.
3. Demand line of credit. In rare cases of a demand line of credit, the lender can call the loan for repayment at any time. This could lead to added stress and anxiety if you’re not financially prepared.

A personal line of credit can be a great option for some borrowers, while others may do better with a different financing option. 

Let’s get into some of the pros and cons of personal lines of credit you should weigh in your decision-making process.

Drawbacks of a personal line of credit:

• Variable interest rates can make monthly payments unpredictable. Line of credit interest rates are subject to change atPLOCs often have variable rates that can change at any time, which can make it harder to predict your monthly payment or total borrowing costs. That said, lenders are required to give you advance notice before a rate change takes effect. 
• Most lenders require a credit score of 700 or higherLenders rely heavily on your credit score and payment history when evaluating PLOC applications. Most require a score of 700 or above, so if your credit is damaged or thin, this product may not be accessible to you right now.
• Annual or monthly maintenance fees are commonSome lenders waive them, so it’s worth shopping around before committing to one.
• Higher rates than secured loans because no collateral is required
• Easy access can tempt overspendingEasy, ongoing access to funds is a genuine risk for some borrowers. If you carry a balance that grows faster than you can pay it down, you can end up in a worse financial position than before.

Benefits of a personal line of credit:

• Pay interest only on the funds you use. If you take out a personal line of credit, you owe interest only on the money you withdraw from the loan, as opposed to paying interest on the overall loan amount available to you. If you have a $20,000 credit line but only draw $5,000, you pay interest on $5,000, not $20,000. For projects where you’re not sure how much you’ll need, this can save you real money.
• Flexible access and consistent cash flow. With a PLOC, you have access to the overall limit of your loan throughout your predetermined time period, which typically lasts years. And once you’ve paid back the amount you’ve borrowed from your line of credit, the full amount becomes available to borrow again.

• Potential to pay off high-interest debt. A personal line of credit can be used for a variety of needs, so it can be a great way to pay off higher-interest debts like student loans. Keeping your PLOC balance low can also support your credit utilization ratio over time, which may help your credit score.

How does a personal line of credit compare?

How should you decide which financing option is right for you? Let’s take a closer look at some of the key differences between a personal line of credit and two other popular financing options—personal loans and credit cards.

Personal line of credit vs. personal loan

The clearest way to think about this: a personal loan gives you a fixed lump sum upfront with set monthly payments for a defined period. A personal line of credit lets you borrow what you need, pay it back, and borrow again. If you know exactly how much you need and want a predictable repayment schedule, a personal loan is usually simpler. If your costs are harder to predict or you need ongoing access to funds, a PLOC gives you more control.

Feature	Personal Loan	Personal Line of Credit
Structure	Fixed lump sum upfront	Revolving: borrow, repay, repeat
Better for	Known, one-time expenses	Ongoing or unpredictable costs
Repayment	Fixed monthly payments	Flexible; minimum payment required
Interest charged on	Full loan amount	Only funds withdrawn
Credit typically required	Good credit	Strong credit (typically 700+)

Note: Examples are for illustration only. Actual rate, term, and savings will vary based on your credit profile and lender 

With a personal loan:

• You may find it easier to budget because the repayment terms are laid out for you from the start.
• You don’t have to put up any assets or collateral when it comes to unsecured personal loans.
• You need to know how much money you need to borrow, as you’re only approved for a fixed amount of money and you must repay it at a fixed payment over a fixed period of time. Common reasons people take out personal loans include debt consolidation and covering major medical expenses. In both cases, you already know the dollar amount you’ll need.

With a personal line of credit:

• You have flexibility when borrowing. You can borrow up to your maximum limit, repay those funds, and then borrow again as you need to.
• You can borrow, pay down your balance, and access your available credit line again and again. 
• You don’t have to know in advance how much money you’ll need. This is best-suited for ongoing projects with unknown costs, like home remodeling projects.

The application process for applying for a personal loan and a personal line of credit is similar. A bank or lender will take a hard look at your credit history, income, and assets to decide whether you’re a safe risk. Your odds of getting approved for either type of financing are best when you have solid credit, though lenders may want your credit to be in better shape for a line of credit.

Personal line of credit vs. credit card

Both products let you borrow up to a set limit, repay, and borrow again. But they work differently in a few important ways.

Feature	Credit Card	Personal Line of Credit
Interest rates	Typically higher	Typically lower than credit cards
Credit limits	Usually lower	Often higher; better for major projects
Interest-Free Period	Yes: interest-free intro period	None
Account length	Open indefinitely	Typically set draw period
Better for	Everyday purchases and rewards	Large, irregular, or ongoing expenses

Note: Examples are for illustration only. Actual rate, term, and savings will vary based on your credit profile and lender

– Interest rates. Interest rates on personal lines of credit are typically lower than they are for credit cards.

– Different limits. With PLOCs, borrowing limits are often higher, making them a better fit for expensive, ongoing projects like home renovations.

– Interest-Free Periods. When you open a new credit card, there’s usually an Interest-Free Period in the beginning where you don’t have to pay interest. There’s no such Interest-Free Period with a PLOC.

– Length of account. PLOCs have a predetermined length of time you can access them, whereas credit cards can be open indefinitely.

One other distinction worth noting: credit cards offer consumer protections that PLOCs may not offer, including fraud coverage and the ability to dispute charges through your card issuer. If vendor reliability is a concern, that matters.

Is a Personal Line of Credit Right for You?

Deciding whether a personal line of credit is the right choice for you is a decision to consider carefully. Take into account several factors, including your financial situation, credit history, and ability to cope with fluctuating interest rates.

A PLOC tends to make sense if you:

– Have an ongoing project with costs that are hard to pin down upfront, like a multi-phase renovation

– Want the flexibility to borrow only what you need and pay it back on your own timeline

– Have a strong credit profile (700+) and a stable, reliable income

A personal loan or credit card may serve you better if you:

– Know exactly how much you need and prefer the predictability of fixed monthly payments

– Want to earn rewards on everyday purchases

– Need funds quickly and may not meet the credit requirements for a PLOC

Frequently asked questions

What credit score do you need for a personal line of credit?

Most lenders require a minimum credit score of 700. Some may approve borrowers in the 680 to 699 range, but usually at higher interest rates or with lower credit limits. If your score is below that threshold, taking a few months to pay down existing balances and correct any errors on your credit report can make a real difference before you apply.

Is a personal line of credit better than a personal loan?

It depends on what you’re trying to do. A personal line of credit is generally better for ongoing or open-ended expenses where you want to draw funds as you go. A personal loan is typically better for a single, defined expense where you want a clear repayment schedule and a predictable monthly payment.

Does applying for a personal line of credit hurt your credit score?

Yes, most applications trigger a hard credit inquiry, which can knock a few points off your score temporarily. The effect is usually small as long as you continue making on-time payments on your other accounts.

What are typical interest rates on a personal line of credit?

For well-qualified borrowers, PLOC rates typically fall between 9% and 17% APR. The exact rate depends on your lender, your credit score, and where the broader rate environment sits at the time you apply. Because these rates are often variable, it’s worth understanding what your rate could look like in a higher-rate scenario before you borrow.

Can you pay off a personal line of credit early?

Yes, and there’s usually no prepayment penalty for doing so. Paying down your balance faster than the minimum reduces the interest you owe and frees up your available credit for future draws. You can move at whatever pace works for your budget, as long as you make the minimum monthly payment.

What’s the difference between a personal line of credit and a HELOC?

A personal line of credit is unsecured, meaning you don’t need to put up any collateral. A HELOC (home equity line of credit) is secured by your home, which usually means a lower interest rate and higher borrowing limit. The tradeoff is risk: if you fall behind on a HELOC, the lender has the right to move toward foreclosure. For borrowers who own a home and want the lowest possible rate, a HELOC may be worth considering. For those who want flexibility without putting their home on the line, a personal line of credit is the safer choice.