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Banking

Personal line of credit: A useful mix of a credit card and personal loan

A personal line of credit can be a useful way to borrow money with flexible terms.

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We earn a commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

Wells Fargo started informing consumers this week they would be eliminating their personal line of credit product. In the letters reviewed by CNBC, the bank stated they are shifting their focus to credit cards and personal loans.

They also stated that for consumers who currently have a personal line of credit open with the bank, that their credit score may be impacted when the product is ended. This short notice has displeased consumers and bank industry critics alike.

But what exactly is a personal line of credit? Select walks you through what you need to know about the product, including the pros and cons, and what to be aware of when you are applying so you can choose the one that best aligns with your needs.

What is a personal line of credit?

A personal line of credit, sometimes abbreviated as PLOC, is a set amount of credit made available to you by a financial institution over a set period of time. Many consumers use a personal line of credit to consolidate debt, expand their business, pay medical bills, refinance existing debt, renovate their home and more.

A personal line of credit is somewhat of a crossover between a credit card and personal loan. However, there are a few distinguishing features:

  • A personal line of credit can allow you to receive funds in allotments, whereas a personal loan is a lump sum delivered at once.
  • Interest accrues only on the amount you have drawn from.
  • Once the line of credit is fully paid back, you may be able to draw on the money once again. This feature is not always available and dependent on the lender.
  • There may be fees associated with applying and having the line of credit, including application fees or maintenance fees. This will vary lender to lender.

Pros and cons of a personal line of credit

There are several use cases where a personal line of credit makes sense, while in other scenarios it may not. As with any personal finance decision, it is advantageous to explore all of your options.

Pros

A personal line of credit is an excellent way to access capital. However, each lender may restrict what you are able to use your funds for, so be sure to check into the terms from the lender. Here are a few pros of using a personal line of credit:

  • Accessibility to funds: For example, if you are approved for $50,000 in credit, you do not need to take the entire amount out. You can take out how much you want, whenever you want. You will have access to the entire line of credit during a "draw period".
  • Strategic usability: Similar to a personal loan, you can use the funds to refinance debt such as student loans or a car loan. For example, if you have a $20,000 car loan and $10,000 student loan balance, you can apply for $30,000 in credit to pay off those two loans at once. This could potentially lower the amount you'd have to pay in interest.
  • Flexible lending: Similar to a credit card, the lender may replenish access to your entire line of credit based on repayment. This is sometimes referred to as an open-end credit transaction.

Cons

A personal line of credit is a different type of lending product with several unique benefits, but there are also a few drawbacks to keep in mind:

  • The risk of unsecured loans: A personal line of credit is considered an unsecured loan because there is no collateral taken by the lender. This typically results in higher interest rates since the financial institution assumes all of the risk.
  • High credit score required: Because the loan is unsecured and in some cases, the line of credit can be hundreds of thousands of dollars, a credit score of over 700 is typically required.

Alternatives to a personal line of credit

For consumers looking for additional capital to accomplish their goals, a personal line of credit is one of many products to choose from. However, if you aren't able to qualify, don't fret. There are other options available to consumers for lending.

  • Personal loans: The largest difference between a personal loan and a personal line of credit is that a personal loan is a closed-end transaction. The lender will issue the funds, and expect repayment on a set timetable.
  • Credit cards: A credit card is more designed for short-term purchase financing, whereas a personal line of credit is for larger financial transactions and investments. Most credit cards have much higher interest rates than a personal line of credit and you'll face high fees and interest if you don't pay off your entire bill every month.
  • HELOC: Short for a home equity line of credit, you can apply to pull equity out of your home for financing. Since this is a collateralized loan, interest rates will typically be lower than a personal line of credit.

How to qualify for a personal line of credit

Qualifying for a personal line of credit is simple. Once you find a lender with a personal line of credit product that matches your needs, you will be asked for information regarding your current financial picture. This may include:

  • Bank statements
  • Investment portfolio
  • Employment history
  • Proof of income
  • Statement of what the credit line will be used for

Your credit score will be checked as well, so be sure to monitor your credit closely to ensure there aren't any errors.

Banks that offer personal lines of credit

While Wells Fargo has eliminated the personal line of credit product, there are an ample amount of banks still offering the same. Each institution offers different lending amounts, terms and fees, so be sure to compare between institutions to find the best one for you.

Bottom line

A personal line of credit can be used as a strategic tool to manage debt, grow a business or renovate a home. While Wells Fargo has eliminated the product from their offerings, there are several other banks that still offer it. And with the right interest rate and terms, a personal line of credit could be a helpful resource for you in your financial endeavors.



Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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