A line of credit is an open-ended loan that lets you flexibly withdraw funds up to a set credit limit. You only pay interest on money you have withdrawn at a given time.
A personal line of credit loan is similar to a credit card, in that you can borrow and repay money as and when needed. Lines of credit typically have higher interest rates than other types of personal loans.
There are also lines of credit available for home loans where you use your property as security against the loan.
How is a line of credit different from a standard personal loan?
A line of credit is generally more flexible than a standard personal loan.
Most personal loans give you a fixed loan term to repay the principal amount plus interest and fees, whereas a line of credit personal loan lets you borrow money up to a maximum limit at your discretion, and often has a flexible repayment schedule.
What can a personal line of credit be used for?
A line of credit could be good to use for just about any purpose, including:
- Paying for renovations to a home
- Paying living expenses
- Covering surprise medical bills
- Buying a car
- Hosting a wedding
- Going on holiday
Before taking on any debt, carefully consider the costs (such as interest and fees) compared to the potential benefits.
How much can you borrow with a line of credit?
Your credit limit will be based on a range of factors, from your credit score to your income and expenses. In some cases, you may be able to borrow anywhere from $4,000 to $50,000 with an unsecured line of credit, or up to $100,000 for a secured line of credit (one wherein an asset is used as collateral, and the lender can repossess the asset of the borrower doesn't repay their debt).
What credit score do you need for a line of credit?
No specific credit score can guarantee you’ll be approved for a line of credit personal loan, but the higher your credit score, the more favourably lenders will likely consider your application.
A higher credit score may see a lender charging you a lower rate of interest or giving you access to a larger amount of credit. If your credit score is not as high as you would like it to be, you might consider taking steps to improve it before applying for a personal loan.
How hard is it to get approved for a line of credit?
The difficulty of applying for a line of credit may depend on your own personal financial situation and how well you can meet the lender’s eligibility criteria.
The lending criteria for a line of credit will generally be similar to any other personal loan. You will need to supply your lender with:
- proof of your age and identity
- proof of a regular income (typically payslips)
- proof of savings (in the form of bank statements), and
- a list of your assets and liabilities
A lender will consider these factors, as well as your credit score, when deciding how much to approve you for.
What are the pros of a personal line of credit?
There are convenient aspects to a line of credit, including:
- Only one application required: You can keep drawing funds up to your approved limit, as well as make repayments, whenever it’s convenient, rather than applying for a new loan each time.
- You’re only charged interest on what you use: While interest rates on lines of credit are typically higher than on other types of personal loans, you will only be charged interest on the amount that you have actually drawn.
- A financial safety net: If you feel you are able to manage your money without being tempted to overspend, a line of credit could provide access to money in an emergency.
What are the cons of a personal line of credit?
There are a number of possible downsides to a line of credit, including:
- Higher fees and charges: A line of credit will typically have a higher interest rate than a standard loan, plus there will typically be monthly fees, though some lenders may only charge a monthly ‘maintenance’ fee if the line of credit is not used.
- Penalties: Lines of credit come with flexible repayment terms, but failure to abide by the loan terms could see you incurring penalties, which could cost you significantly more than you planned for.
- Temptation to spend: The ease of access to funds, coupled with the flexibility of repayments, could tempt you to overspend, which could leave you in quite a lot of debt if you’re not careful.
If you are considering taking out a loan but are unsure if a line of credit is appropriate for your needs and situation, you can compare personal loans to find a loan product with terms and features that may suit you. You may also like to consider seeking independent financial advice to support your decision.
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