What Is A Personal Line Of Credit And How Does It Work?

9 Min Read
Updated Oct. 6, 2023
Written By
Miranda Crace
Young woman single mother is doing home budgeting

When an unexpected expense or emergency pops up and you don’t have enough cash on hand, a personal loan can help you gain access to funds quickly. But while you might benefit from having a large lump sum deposited right into your checking account, other financing options are available – and one of them may work better for you than a personal loan if you need assistance with monthly bills or other recurring expenses.

That option, simply put, is a credit line. But what is a personal line of credit and how does it work? Let’s discuss the pros and cons of a personal line of credit, how to get one, and some helpful alternatives.

What Is A Personal Line Of Credit?

A personal line of credit is a revolving credit line that you can borrow from on an as-needed basis up to a certain amount. It’s typically unsecured, meaning collateral isn’t required to qualify for it. With no collateral necessary, you’ll usually need a strong credit score of around 670 or higher to qualify. Occasionally, lenders will offer secured credit lines, which we’ll discuss later on.

Interest rates for personal lines of credit are usually variable, and lenders will only charge interest on the amount of the loan you use, rather than the total loan amount. Once the draw period – the time in which you can withdraw funds – ends, the repayment period begins. Repayment terms vary by lender and can last for a number of years.

Typically, personal lines of credit can range from $1,000 – $100,000. You can use these funds for whatever you’d like – from home improvements to medical expenses to business ventures or anything else you deem worthy of the investment.

See What You Qualify For

How Does A Personal Line Of Credit Work?

A personal line of credit operates like a credit card. During the draw period, you can borrow as much or as little from your credit limit as you’d like. Some lenders may require you to make minimum monthly payments during the draw period, while others might charge you interest only.

You can always make payments on any amount you’ve borrowed during the draw period, freeing up additional funds. When the draw period ends, you’ll be required to pay back what you’ve withdrawn, plus interest. If you want to maintain access to a personal line of credit, you’ll likely have to reapply after the draw period ends.

Unsecured Vs. Secured Personal Lines Of Credit

There are two important types of personal lines of credit to be aware of: unsecured and secured. Let’s take a look at both and how they work.

Unsecured Personal Line Of Credit

To review, an unsecured personal line of credit is a type of revolving credit that doesn’t use any collateral. When you offer collateral to a lender, they’re more likely to issue you money because they can seize your assets if you’re unable to pay the money back. Because they don’t call for this additional form of security, unsecured personal lines of credit typically require a higher credit score, and borrowers with a poor credit history might struggle to qualify. These also typically come with higher interest rates.

Secured Personal Line Of Credit

A secured personal line of credit, on the other hand, requires collateral. This collateral can take the form of your car, your house or another asset that’s financially valuable in the eyes of a lender. Offering one of these assets can increase your chances of approval and help you secure better loan terms and a lower interest rate. But remember that when you offer your home or car as collateral, you risk losing it if you suddenly become unable to pay, so be cautious when choosing a secured line of credit.

What Fees Come With A Personal Line Of Credit?

One unique feature of a personal line of credit is the set of fees that borrowers must pay to use one. From the application process to the repayment period, here are some of the fees to prepare for:

  • Application fee: Many lenders will charge a fee upon receiving an application for a personal line of credit or loan.
  • Maintenance fee: Banks might charge a maintenance fee that covers the costs of keeping an account open.
  • Origination fee: This fee covers the cost of processing a line of credit or loan.
  • Transaction fee: You may see a transaction fee each time you access funds from your credit line.
  • Late fee: If you fall behind on payments, you may face a late fee from your lender. Check to see if your lender offers a grace period if you miss a payment.

Pros And Cons Of Personal Lines Of Credit

Now that you know how personal lines of credit work, it’s important to weigh the pros and cons of using this financing option. Here’s an overview of the advantages and disadvantages of personal lines of credit.


  • Quick application process
  • Quick access to funds
  • Lower interest rates than some credit cards
  • Flexible repayment schedules
  • Flexibility to use the funds as you desire
  • Interest charged only on the amount you withdraw
  • No collateral needed for unsecured personal lines of credit


  • Variable interest rates that make it difficult to plan how much you’ll owe
  • Potential difficulty being approved with poor credit
  • Additional fees upon application and potentially with each withdrawal
  • Non-tax-deductible interest
  • Can require an existing bank account with the lender
  • Possible credit score drop with large amount borrowed
  • Potential for higher interest rates on unsecured loans

How To Get A Personal Line Of Credit

Now that you’ve weighed the pros and cons, how do you get a personal line of credit? To begin, you’ll need to make sure you meet the credit requirements designated by your lender. If you have a good credit score and credit history, you can then take the time to evaluate your financial situation. Decide how much money you need and how regularly you’ll need to access it.

Then, shop around for a lender that’s a good fit for you. Compare interest rates and loan terms from different lenders – banks, credit unions, etc. – as most terms will vary depending on where you apply. Some lenders will require that you already have a bank account with their institution, which may add a step in the process for new clients.

After you’ve found the right lender with the best terms you can get, you can start the application process. If it’s online, you can simply enter your personal information and wait to hear back from the lender. Once approved, you may be able to access the credit line in as little time as 24 hours.

Alternatives To Personal Lines Of Credit

There are alternatives to personal lines of credit that may be a better fit for your credit score or your financial needs. These are just a few options:

Personal Loan

Personal loans are different from personal lines of credit in that they’re typically repaid in monthly installments. They’re also distributed in one lump sum, rather than in the form of a credit line that can be used in bits and pieces as needed. Finally, interest rates for standard personal loans can be lower, and borrowers may be able to secure a fixed interest rate unlike the variable rates that usually come with personal lines of credit.

Home Equity Line Of Credit (HELOC)

A home equity line of credit (HELOC) is a type of secured credit line that works similar to a personal line of credit. With a HELOC, you borrow against your home’s equity, meaning you put your home up as collateral. A HELOC may require a lower credit score than an unsecured personal line of credit because it’s less risky for the lender.

Home Equity Loan

A home equity loan is based upon the value of your home and the amount you can borrow is based on lender guidelines as well as how much of your existing mortgage balance you’ve paid off. Rather than being a line of credit, it’s a lump sum secured by your home.

The advantage to this is that you don’t have to refinance your existing mortgage if you have a really low rate you don’t want to touch. Whether this or a cash-out refi makes sense is a bit of a math problem, so feel free to speak with a lender.

Credit Card

If your personal line of credit requires a transaction fee each time you access it, a credit card could be a wiser financing option. There are also certain cash-back terms or rewards to consider that might make you choose a credit card over a personal line of credit. In addition, credit cards have no draw period, meaning you can use your credit card indefinitely. However, credit cards tend to have higher interest rates.

Business Line Of Credit

A business line of credit operates like a personal line of credit, but it’s made for business owners. It can help owners keep up with regular business expenses like acquiring new machinery, inventory, etc. To qualify for a business line of credit, you’ll need good credit and most likely a verifiable history of at least 2 years as a profitable business. This type of credit line can be secured or unsecured like a personal line of credit.

Personal Line Of Credit FAQs

Now let’s take a look at some frequently asked questions about personal lines of credit.

How are a personal line of credit and a personal loan different?

A personal line of credit is a type of revolving credit line that you can draw from whenever you need it. A personal loan, on the other hand, is distributed in one lump sum that you’ll pay back in monthly installments.

What credit score do you need to get a personal line of credit?

Borrowers will typically need a minimum credit score in the neighborhood of 670 to qualify for a personal line of credit. However, credit requirements vary by lender. 

Can a personal line of credit affect my credit score?

As with a loan, missed payments on your personal line of credit can affect your credit score negatively. Hard inquiries can also have a negative effect, along with paying off and closing an account since that means removing an account that was positively impacting your credit score and credit mix.

How do I use my personal line of credit?

Since many banks require that personal line of credit holders have a checking account open with their institution, you can usually access your funds through a debit card or by writing a check attached to the account.

The Bottom Line

Personal lines of credit are a type of financing offering continuous access to funds for those who need help making ends meet or paying unexpected expenses. While personal lines of credit can have stricter credit requirements than other types of financing, their flexibility with regard to repayment and usability makes them appealing to certain borrowers.


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