How Does a Personal Line of Credit Work?

A personal line of credit (PLOC) is a revolving form of credit that works like a credit card. It allows you to borrow funds on an as-needed basis up to a predetermined limit, paying interest only on the amount you use.

Unlike personal loans, which offer a lump sum with fixed monthly payments, a PLOC is typically unsecured. This makes a PLOC useful for those “what if” scenarios when you’re not sure how much you might need.

What is a PLOC?

A personal line of credit (PLOC) is a revolving loan that gives you a maximum borrowing limit that you can draw on – much like a credit card. The lender sets the terms of your PLOC, which can include a draw period and repayment periods. During the draw period, you can borrow funds as needed and only pay for what you use.

Unlike home equity lines of credit, which require your house as collateral, a PLOC does not. This can make it a good choice if you don’t have a lot of collateral to put up against the loan.

One downside to a PLOC is that it can impact your credit score, since the amount you owe on the loan can factor into your credit utilization. That’s why it is important to monitor your balance closely and only withdraw funds as necessary. You may also face fees to access your PLOC funds, like annual, maintenance and late charges.

How does a PLOC work?

A personal line of credit is a form of revolving debt that functions like a credit card. The lender will usually give you a fixed period of time in which you can borrow funds (known as the draw period) and once that period ends, you’ll enter the repayment period in which you’ll make monthly payments.

As with other revolving debt, PLOCs only charge interest on the money you actually borrow. This can make them more cost effective than a personal loan, especially if you need quick access to cash to cover expenses or fund an emergency.

However, personal lines of credit are unsecured, meaning the lender doesn’t have any collateral to offer in case you default on the debt. This can make them riskier for some borrowers than other fast-capital options like a payday loan or home equity line of credit. Because of this, PLOCs are typically reserved for those with good or excellent credit histories.

What is the difference between a PLOC and a personal loan?

While both types of credit allow borrowers to borrow up to a specific amount within a set time frame, PLOCs usually do not require collateral like car or home equity. The lender takes a risk that the borrower will pay back what they have borrowed plus interest. To qualify for a personal line of credit, borrowers should have a good credit score and history and must be able to manage revolving debt.

Unlike a personal loan, PLOCs often come with higher variable interest rates and do not offer a grace period at the beginning of the term. Also, a personal line of credit can be closed at the lender’s discretion, which may lower the available credit, and since revolving debt is responsible for about 30% of a FICO score, that could have an adverse impact on a borrower’s score. Lastly, there are fees associated with PLOCs such as maintenance or transaction fees. These fees vary by lender.

What are the types of lines of credit?

There are two main types of personal lines of credit: secured and unsecured. Secured lines of credit require collateral, such as a car or home, to secure the loan. Unsecured personal lines of credit do not require collateral but may have higher interest rates than other loans.

A PLOC offers a flexible lending solution for individuals with short-term cash flow needs, as well as those with changing income or fluctuating spending habits. However, it’s important to understand the benefits and drawbacks before applying for a PLOC.

PLOCs are revolving debt, meaning you pay back only what you use and not the entire amount of the credit line. As a result, they often come with lower interest rates than loans. But, they also come with additional fees such as maintenance and origination fees. Additionally, a PLOC may only be available for a fixed window of time before it’s required to enter repayment. These restrictions may prevent a PLOC from being the best option for some borrowers.