A personal line of credit, otherwise known as a PLOC, is a revolving type of credit issued to you by a financial institution or bank that you are currently an active member or customer of. Similar to a credit card, a line of credit has a predetermined amount that you are allowed to borrow and use as needed. As you use the available money and withdraw from this line, you’ll be required to pay it back in increments. Unlike personal loans, you are allowed to keep withdrawing from your available funds as long as you manage your payments and don’t exceed the maximum limit.
How Does a Personal Line of Credit Work?
Personal lines of credit work more like a credit card than they do a conventional loan. Unlike a conventional loan, you don’t have to use or borrow all of the money you are allotted.
You don’t have to borrow a specific amount and pay it back in installments over a set period of time. Instead, you can borrow as you go and pay it back like you would when managing a credit card.
However, some personal lines of credit will have an “expiration date”, so to speak. When a financial institution issues a personal line of credit, they aren’t meant to stay around forever. For instance, if you choose to open a personal line of credit for $3,000, the line of credit may be good for around 3 to 5 years, depending on the agreed-upon terms.
During the years that your line of credit is open, you can borrow up to your available credit limit with a replenishing balance and pay it back as you do so. At the end of the predetermined mark, you’d have to reapply in order to keep the line of credit open and functioning. You may even receive a specific card from your financial institution to access your line of credit.
Types of PLOC
The length of a personal line of credit may vary depending on the financial institution or lender you decide to work with. It also depends on the type of PLOC you secure. There are two types of lines of credit – secured and unsecured. Secured lines of credit are guaranteed by collateral. Collateral for a PLOC would be a home or a car. It can also be something else equal to or more than the value of the amount borrowed.
With collateral being on the line, borrowing limits may increase but will not exceed the value of what is offered. If the borrower does not keep up with their required payments, the financial institution has the right to collect on the collateral. After seizing the collateral after a period of default, the institution or lender will close the personal line of credit. Examples of secured lines of credit include HELOCs and a line of credit using your car as collateral for funding.
An unsecured line of credit is more like a credit card and does not require collateral. Depending on the borrower’s credit history and income, the limit of an unsecured line of credit may be lower due to the risk involved with having no guarantee of repayment because collateral is not involved. Borrowers with poor credit scores will have a harder time being approved for this type of personal line of credit, and they incur higher interest rates than those of secured lines of credit.
What are the Limitations of a Personal Line of Credit?
The sky’s the limit when you have a personal line of credit. But, you have to be financially responsible and keep your spending in check. Borrowers can use money that they withdraw from a line of credit to finance home renovations or other home or car projects that have an unpredictable cost. In most cases, it doesn’t matter what you decide to use the money on- As long as it’s for a personal expense that you can pay it back.
When carrying a balance on your personal line of credit, you should try to pay it back before the billing cycle ends. If not, you will be increasing your overall credit utilization ratio. If you have a high credit utilization ratio, you run the risk of negatively impacting your score. As a general rule of thumb, you should work towards paying off your debts and keeping your credit utilization ratio under 30%.
How Many Lines of Credit Should I have?
There isn’t a set number of credit lines that some financial experts will recommend that you should have. Deciding on how many lines of credit you should utilize depends on your financial situation, income, and money management skills. If you struggle to keep your spending in check sometimes, it’s best to limit your lines of credit to one or two.
This can help to prevent you from overspending and getting into debt. Additionally, having multiple lines of credit can also make it difficult to keep track of your finances and manage your debt.
What financial experts will recommend is diversifying your credit profile. This means having a healthy mix of credit cards and loans. Having a diverse credit profile shows that you are capable of managing different kinds of debt. This factor can help increase your creditworthiness to lenders, especially if you keep a low credit utilization ratio.
Personal Loan VS. Personal Line of Credit – What’s the Difference?
Personal loans and personal lines of credit are both the same in the sense that they are meant to finance personal purchases such as home renovations or car upgrades. Both a loan and a line of credit require interest payments and have similar baseline qualifications that must be met before someone is allowed to borrow.
There are a few key differences that set personal loans and personal lines of credit apart from each other.
Loan Structure
Personal loans are given to the borrower as one lump sum. This means that if you need more money in the future, you’ll have to apply for more financing again to access more money. Personal lines of credit are a borrow-as-you-need type of structure, in stark contrast to personal loans.
Interest
With a personal loan, the borrower is responsible for paying interest on the entire borrowed amount. With a personal line of credit, you only pay interest on what you actually used – not the whole limit. Personal loans will usually have a fixed interest rate, as well. Comparatively, lines of credit have a variable rate and could be higher than a personal loan, depending on your creditworthiness.4
Repayment Terms
Personal loans typically come with installments, meaning that you will have fixed payments on a predetermined schedule. The date and repayment amount are estimated before the borrower is given the lump sum. For lines of credit, because the borrower determines the amount they use, the payment amount will fluctuate every month.4
Choose Max Cash and Get Connected to Personal Loans
Max CashⓇ can conveniently connect you with personal loans! If you are searching for an influx of funds to handle personal expenses, a personal loan can be a lifeline. Starting this process can be simple and convenient! Just fill out a short online form to begin your loan inquiry. A team of experienced financial experts ready to help you. So nothing is stopping you from putting in new kitchen cabinets or renovating your gaming setup!2 5
If you have questions about personal loans, don’t hesitate to speak with a loan agent at 833-207-9052 today! Experienced loan agents are available for extended hours to make sure that your questions are answered.2 5
