What is a Personal Line of Credit?

Q: I need access to funds for some bigger expenses, so I’m thinking about a personal line of credit. What’s the difference between this loan product and a personal loan or credit card?

A: Personal lines of credit can be a great way for flexible access to a large amount of cash with minimal hassle and easy payback terms. Let’s look at how it differs from traditional personal loans and credit cards, as well as why it can be a fantastic way to access necessary funds.

What’s a personal line of credit?

A personal line of credit (PLOC) is a form of revolving credit up to a specified amount. The borrower can use the money as needed until the maximum amount (aka “limit”) is used. As the borrower makes monthly payments toward the balance, the available credit is updated appropriately.

A PLOC has two phases: the draw period and the repayment period. During the draw period, the borrower can take out money as needed from the available credit line. They can make payments during the draw period, but once the formal repayment period begins, the borrower can no longer take out cash from the credit line.                                                                                             

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 can be used immediately as needed. Personal loans generally have a fixed interest rate and a fixed payment amount throughout the term.

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 are generally adjustable. However, a PLOC typically has a lower interest rate than a credit card. It also has a limited life term, unlike a credit card, which can be open for years.

When is it a good idea to choose a personal line of credit?

A PLOC can be a great and flexible borrowing option in circumstances when the borrower doesn’t know the exact upfront costs, like home improvements, weddings – even adoptions. It can also be a good way for a borrower with fluctuating income to get through tighter months.