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What Is a Personal Line of Credit? How It Works + Pros and Cons

Sophie Isbell • December 15, 2023

When you need funds quickly, your first instinct may be to swipe your credit card – especially if you don’t have enough money in your savings. However, a personal line of credit (PLOC) might be a better choice for your long-term financial health with its lower interest rates than credit cards and is sometimes tax deductible. 

If you need access to cash and a flexible repayment plan, read on to learn more about personal credit lines. Below, we’ll tell you more about how they work, and the pros and cons of using them. 

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What is a personal line of credit?

A personal line of credit is a type of financing you can use to repeatedly withdraw (and repay) money up to a certain limit.

Personal lines of credit can come in handy when you’re working on a long-term project or preparing for unexpected expenses. If you do choose to get a personal line of credit, you can choose between a secured or unsecured one.

  • Unsecured PLOC: Most personal lines of credit are unsecured. This means you don’t have to place any collateral to borrow money. But as a trade-off, you might have to accept lower credit limits and higher interest rates
  • Secured PLOC: You can usually get better interest rates and higher credit limits with a secured personal line of credit. This is because you have to place collateral which helps reduce some of the lender’s risk. 

A personal line of credit can help you manage your finances, especially compared to other types of high-interest credit. Of course, you should understand the ins and outs of PLOCs and draft a repayment plan before you borrow to avoid getting into debt.

How does a personal line of credit work?

There are a few things you have to decide on your own before you can get a personal line of credit. For instance, do you want a secured or unsecured credit line? And do you want closed-end or open-end credit? 

Once you decide, getting and using a personal line of credit goes something like this: 

  • A lender approves or pre-approves you. A lender will review your income, credit score, and other relevant factors to determine your maximum borrowing limit.
  • You use the money as needed. Once approved, you can use the money whenever you need it, only paying interest on the amount you use. 
  • You pay back the amount you borrowed and interest. Interest charges begin to accrue when you use the borrowed money. You usually have to make a minimum payment for continued access to your line of credit.
  • Your personal credit line closes or recuperates: Most times, your credit line will remain available to you as you pay your debt. However, if you get a closed-end credit line, it will be like paying off a loan – when you spend and pay back the money, you can’t use it anymore. 

Pros and cons of PLOC

A personal line of credit has several advantages over other sources of borrowed money, but that doesn’t mean it’s right for everyone. Consider the pros and cons when deciding whether to use a personal line of credit.

  • Fast access to funds: A personal line of credit gives you quick and easy access to money.
  • No collateral required: Other loan options require you to place personal assets as collateral, but many personal lines of credit are unsecured.
  • No interest on unused funds: You only pay interest on the amount you borrow, not the full amount.
  • Revolving funds: If you make on-time payments on your open-ended PLOC, you can borrow those funds again.
  • Can use it for different expenses: You can use the money you borrow from a personal line of credit to pay off urgent debts and expenses.
  • Variable interest rates: Many personal lines of credit have a variable interest rate, which can lead to higher payments.
  • Annual or monthly fees: Your personal line of credit may have a monthly maintenance fee or other fees, which you pay in addition to any interest.
  • Interest isn’t tax-deductible: The interest you pay on a personal line of credit isn’t tax-deductible, which increases the cost of borrowing.
  • Chance of overborrowing: It can be tricky to manage your debt if you withdraw more than you can afford.

2 types of personal credit lines

There are two primary types of personal lines of credit: Home Equity Lines of Credit and overdraft protection. 

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a type of revolving credit that allows homeowners to borrow against the equity in their property. The borrower can access the funds through checks or a credit card linked to the HELOC, and they only pay interest on what they borrow.

  • Maximum withdrawal amount: Usually, you can withdraw up to 85% of your mortgage balance but no more than 85% of your home’s value.¹
  • Type of interest: Variable.²

Overdraft Line of Credit

An overdraft line of credit is a financial arrangement that allows an account holder to overdraw their checking account up to a specified limit. It works as a personal line of credit by covering transactions when you experience temporary cash flow problems. 

  • Overdraft fees: Typically about $35 per transaction.³
  • Type of interest: Flat fees or standard interest rates.4

How to apply for a personal credit line

The process of applying for a personal line of credit is similar to applying for a new credit card or personal loan. Depending on the lender, you might be able to apply online or in person. Regardless of how you apply, follow these steps to increase your approval odds.

1. Make sure you qualify for a personal line of credit

Look at your qualifications before you start applying for a personal line of credit. It’ll help you narrow your search and find lenders who might realistically offer you funds. 

Here are some qualifications to consider:

  • Good credit: You’ll generally need a FICO® Score in the good to excellent credit range to qualify for a personal line of credit.5
  • Checking account: Some financial institutions might also require you to have a checking account with them. 
  • Payment history: Your credit report should show a proven track record of on-time payments.
  • Financial position: Lenders will check your debt-to-income ratio and may consider other assets, like savings and investments, that could affect your ability to pay back however much you borrow. 

2. Figure out how much money you need

Sit down and figure out how much money you may need over time before choosing a PLOC lender. 

This step can help you determine a credit line limit you’re comfortable with and whether you want an open-end or closed-end credit line. You should also determine how much you can afford to avoid overborrowing. 

3. Compare lenders

Shop around and compare lenders to find a personal line of credit offer that fits your needs. Many lenders let you check your eligibility with a soft credit inquiry that won’t impact your credit score. Take advantage of this, and while you’re at it, talk to one of the lender’s representatives about:

  • Interest rates: Determine if they have a fixed or variable interest rate. Also, ask what the average interest rate is. 
  • Fees and charges: Find out if they have hidden charges like annual fees or early repayment penalties. 
  • Credit line duration: Ask if their personal lines of credit are open-ended or close-ended. 
  • Type of credit line: Find out if you have to place collateral to get a personal credit line and what forms of collateral they accept. 

4. Submit an application

Before you sit down and apply for a personal line of credit, ensure you have all the information and documentation you need. Here’s a list to start with:

  • Proof of identity like a driver’s license, passport, or Social Security card.
  • Proof of income like pay stubs, W-2s, or tax returns.
  • Proof of residence like a lease agreement or mortgage statement.
  • Financial statements like investment or bank statements.

Once you’ve followed the steps above, you’ll then fill out and submit an application. Keep in mind when applying, the lender will ask you to authorize a hard credit inquiry, which can take up to five points off your credit score.6

Set up direct deposit with Chime to get paid up to two days early.*

Alternatives to personal lines of credit

The decision to use a personal line of credit, a personal loan, or a credit card will depend on your current needs and financial goals. Read on to learn when it makes the most sense to use each type of personal credit. 

Personal line of credit vs. personal loan

Personal loans are best for fixed expenses like a roof replacement. A personal line of credit is usually better for ongoing expenses like a remodeling project.

When you take out a personal loan, the bank will give you the total amount upfront, and you have to repay it over a fixed amount of time. Personal loan interest rates are usually fixed and slightly lower than personal lines of credit, but you have less flexibility with repayment. 

Personal line of credit vs. credit card 

It’s smart to use credit cards for smaller or routine purchases like spackle and paint rollers, and personal lines of credit for larger expenses like countertops or labor costs.

Personal lines of credit and credit cards are similar in that you have a credit limit, monthly bills, and minimum payments. The difference is in how you’re supposed to use them. 

Credit cards are for routine and low-cost expenses like groceries, supplies, and subscriptions. They tend to have higher interest rates than personal lines of credit, but they’re more convenient and have better rewards.

Is a personal line of credit right for you?

Personal lines of credit can be useful depending on your financial circumstances – especially if you anticipate needing revolving credit to cover ongoing expenses. However, avoiding more debt is always preferable. 

If an emergency comes up and you are stuck waiting on your paycheck, consider other ways to make money fast before opening a personal line of credit.


Still have questions about getting or using a personal line of credit? Find answers below. 

What’s the difference between secured and unsecured personal lines of credit?

A secured personal line of credit is backed by collateral, which can help you qualify for a lower rate. Unsecured personal lines of credit will typically come with higher interest rates since it’s riskier for lenders to let you borrow that money without collateral. 

Do personal lines of credit have hidden fees?

Personal lines of credit may have additional costs like annual fees, cash advance fees, or late payment penalties. To avoid these, carefully review the terms and conditions before borrowing money. 

How do I repay a personal line of credit?

When you borrow money from a personal line of credit, you have to make monthly payments until you’ve repaid the full amount, including interest. You can usually make payments online or by check or set up automatic withdrawals

Where can I get a personal line of credit?

You can obtain a personal line of credit from financial institutions like banks, credit unions, and online lenders. 

What are my options if I’d rather not take out a personal line of credit?

If you prefer to avoid taking out a personal line of credit, consider alternatives like personal loans, credit cards, or other forms of financing. Or, start putting money into your savings account whenever you can. 

Fee-free overdraft

  • Overdraft up to $200~ without fees
  • Get spotted on debit and credit purchases
  • Temporarily increase your SpotMe® limit with Boosts^
Get Started

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* Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.

1 Information from The Mortgage Report’s What’s the maximum HELOC amount? Guide to HELOC limits
as of 11/28/23:

2 Information from Experian’s How Do HELOC APRs Work? as of 11/28/23:

34 Information from Credit Ninja’s Overdraft Protection as of 11/28/23:

5 FICO® Scores are developed by Fair Isaac Corporation. The FICO Score provided by, Inc., also referred to as Experian Consumer Services ("ECS"), in Experian CreditWorks℠, Credit Tracker℠ and/or your free Experian membership (as applicable) is based on FICO Score 8, unless otherwise noted. Many but not all lenders use FICO Score 8. In addition to the FICO Score 8, ECS may offer and provide other base or industry-specific FICO Scores (such as FICO Auto Scores and FICO Bankcard Scores). The other FICO Scores made available are calculated from versions of the base and industry-specific FICO Score models. There are many different credit scoring models that can give a different assessment of your credit rating and relative risk (risk of default) for the same credit report. Your lender or insurer may use a different FICO Score than FICO Score 8 or such other base or industry-specific FICO Score, or another type of credit score altogether. Just remember that your credit rating is often the same even if the number is not. For some consumers, however, the credit rating of FICO Score 8 (or other FICO Score) could vary from the score used by your lender. The statement that "90% of top lenders use FICO Scores" is based on a third-party study of all versions of FICO Scores sold to lenders, including but not limited to scores based on FICO Score 8. Base FICO Scores (including the FICO Score 8) range from 300 to 850. Industry-specific FICO Scores range from 250-900. Higher scores represent a greater likelihood that you'll pay back your debts so you are viewed as being a lower credit risk to lenders. A lower FICO Score indicates to lenders that you may be a higher credit risk. There are three different major credit reporting agencies — the Experian credit bureau, TransUnion® and Equifax® — that maintain a record of your credit history known as your credit report. Your FICO Score is based on the information in your credit report at the time it is requested. Your credit report information can vary from agency to agency because some lenders report your credit history to only one or two of the agencies. So your FICO Score can vary if the information they have on file for you is different. Since the information in your report can change over time, your FICO Score may also change.Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn More

6 Information from Experian’s How Many Points Does an Inquiry Drop Your Credit Score as of 11/28/23:

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