What is a personal line of credit?

Disclaimer: This article is for general educational purposes only and is not intended to imply that Citi offers the product or product features discussed herein. Citi may have different product offerings and/or eligibility criteria than those mentioned in this article.

Key insights:

• A personal line of credit lets you borrow funds as needed up to your credit limit, similar to a credit card
• Interest is typically variable and only charged on the amount you actually use, not your full credit limit
• Exploring alternatives like credit cards, personal loans and HELOCs can help you choose the right financing based on flexibility, repayment structure and risk

When weighing options for borrowing money, you might consider a personal line of credit. This is a revolving line of credit that allows you to access money as needed over a fixed period and pay it back with interest. Let’s look at how personal lines of credit work, how to get one and alternative financing options.

How does a personal line of credit work?

Personal lines of credit usually have a draw period and a repayment period.

After you open a personal line of credit, the draw period begins. This is the fixed window during which your line of credit is available to you, and you can use the funds for almost anything. When you make payments during the draw period, you’ll free up some of the credit to borrow again, making it a revolving line of credit.

However, personal lines of credit feature a credit limit, meaning that there is a cap on how much funding you can receive. If you hit that limit, you won’t be able to access more funds until you pay off some of your balance.

Once the draw period ends, you’ll begin the repayment period. During the repayment period, you no longer have access to the line of credit and must pay back what you borrowed plus accrued interest.

A personal line of credit is one of several lending products typically available to consumers. Other popular options include credit cards for revolving credit on every day purchases, and personal loans that provide a lump-sum loan for a specific purpose or major expenses.

How do payments work for a personal line of credit?

How payments work depends on your lender and the structure of your personal line of credit.

Most commonly, you’re only required to make minimum monthly payments during the draw period. Once the draw period ends, the full repayment period begins. You’re generally required to pay off the entire balance by the end of the repayment period.

Some personal lines of credit only have a draw period. You’ll be required to make one large payment at the end of the draw period to pay the balance in full. Make sure to check the terms of your lender’s agreement to understand the repayment structure.

How is interest charged on a personal line of credit?

Interest typically begins accruing immediately when you borrow from a personal line of credit.

A personal line of credit usually has a variable annual percentage rate (APR), which means its interest rate can change over time. Variable-rate APRs tend to fluctuate with market conditions, making them less predictable. Your lender should provide you with information about the line of credit’s APR when you apply.

How do you qualify for a personal line of credit?

To qualify for a personal line of credit, you must meet your lender’s standards for creditworthiness and income. These standards can vary from lender to lender.

Benefits of a personal line of credit

Personal lines of credit offer many advantages, including typically quick access to funds that can be used for a variety of expenses.

Flexible access to funds

Personal lines of credit allow for flexibility, which can be useful if you don’t know how much you need to borrow. You can borrow against your credit limit in any amount and at any point during the draw period.

Pay interest only on the funds you use

A personal line of credit comes with an interest rate, which is usually variable. But this rate only applies to money you borrow – not the full credit limit. In other words, if you take out a personal line of credit and never use it, you won’t owe any interest.

For example, if you’re given a $10,000 line of credit and you only use $2,000 of it, you’ll only have to make payments on the $2,000 you borrowed. You can also use the line of credit multiple times, as long as you don’t exceed your limit.

Use funds for almost anything

The funds from a personal line of credit can be used for almost anything. You could use your line of credit to remodel your bathroom, help pay for a wedding or make a large purchase.

No collateral for unsecured lines of credit

Many personal lines of credit are unsecured, which means you don’t have to put up a personal asset, such as a car or home, as collateral.

Alternatives to personal lines of credit

A personal line of credit isn’t the only way to borrow what you need. Here are some alternatives.

Credit cards

Like personal lines of credit, credit cards provide access to a line of credit. Credit card accounts typically stay open until you close them, although the issuer may close the account due to inactivity. This can make them a longer-term borrowing option.

Some new credit cards offer low intro APRs on balance transfers or purchases for a specified period. This can make them a good tool for consolidating debt or making a big purchase, if you can pay off the balance by the end of the intro period.

Personal loans

When you take out a personal loan, you receive a lump sum upfront and pay it back in monthly installments. A personal loan could be the right option if you know how much you need and can budget for the required monthly payments.

Home equity lines of credit (HELOC)

A home equity line of credit works similarly to a personal line of credit, but it lets you borrow against the equity in your home. A HELOC is a secured loan that uses your home as collateral, and it has a variable interest rate. However, if you don’t pay back the loan, the lender may foreclose on your home.

Understand how a personal line of credit works for you

A personal line of credit may be a good option if you need flexible access to funds over a set period. Being aware of the benefits and drawbacks of a line of credit is important, and there may be other funding options that better meet your needs. Speaking with a lender can help you understand the options available to you and meet your financial goals.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.