Using a Personal Line of Credit

Consumers often don't realize the wide range of options available when they want to borrow money. Most people have a credit card, and many have auto loans and mortgages, but fewer use a personal line of credit. Similar to a credit card, a personal line of credit is an unsecured revolving credit account with a maximum credit limit. Personal lines of credit, however, are more flexible than a credit card because you can draw the money with checks, or often in cash, rather than only making card purchases. This makes a personal line of credit a potentially useful financial tool for many people.

Advantages of a personal line of credit

• Often lower interest rates and fees than credit card cash advances, which can make it a less expensive option for long-term borrowing.
• More flexible than a personal loan because it's a revolving credit account, so you can borrow money in small increments as you need it, rather than having to take a new loan each time.
• Do not require collateral to secure the loan. That makes it ideal for people who do not own a home or don't want to put their home at risk through a home equity line of credit.

Disadvantages of a personal line of credit

• Interest rates on a personal line of credit are generally higher than on secured alternatives, like a home equity line of credit. In addition, interest payments are not tax deductible, while interest payments on a home equity line of credit can be claimed by many people as tax deductions.
• Monthly payment amounts can change each month, which can make it difficult to budget for the payments. Payment requirements included all of the interest charges, which are based on a variable interest rate, plus a fixed percentage of the outstanding balance.

Is a personal line of credit right for you?

Before applying for a personal line of credit, take a look at your personal finances and consider your budget and spending habits. In the right situation, a personal line of credit can be a useful financial tool, giving you a security net if you want to have an emergency source of cash.

A personal line of credit might not be right for you if you have a hard time sticking to your budget. You do not want to put yourself into debt that may be difficult to pay back. Also, you might not be able to get a personal line of credit if you have poor credit history or you cannot show proof of steady employment.