What is a line of credit?
A line of credit is a form of personal loan that acts like a credit card. It's a loan that allows you to conveniently draw on funds in the form of a revolving line of credit. You pay towards your balance and the accrued interest in monthly instalments, and you can access more credit (to a predetermined limit) as and when you need to.
What's the difference between a line of credit and a personal loan?
Unlike a personal loan in which the whole amount is transferred into your account, a line of credit grants you access to a credit limit, but the funds remain where they are until you decide to use them. This means you only pay interest on the funds that you use as opposed to the entire credit amount, which you would need to do with a personal loan.
This makes line of credit loans potentially useful to have in case of emergencies. However, you can use the funds for anything you choose, including consolidating your debts or making small or large purchases.
Find out more about this type of loan and if it's right for you in this guide.
Personal line of credit vs personal loan
There are a number of key differences between a line of credit and a personal loan that you should consider before choosing which one is more suitable for your needs. Generally, a line of credit can be more beneficial for someone looking for continued access to an amount of funds, whereas a personal loan may suit someone intending to make a large purchase or other singular expense.
How a line of credit varies from a personal loan
- Access a line of credit
- 6.90% p.a. for 3 years on initial balances transferred (reverts to variable rate 20.49% p.a)
100% confidential application
Citi Ready Credit
Citibank Ready Credit Loan offers a low-rate, flexible personal loan that caters to the needs of simplifying debt.
- Interest rate from: 20.49% p.a.
- Interest rate type: Variable
- Application fee: $199
- Minimum loan amount: $5,000
- Maximum loan amount: $75,000
Compare a range of personal line of credit loans
How does a personal line of credit loan work?
A personal line of credit works much like a credit card, giving you access to a specified credit limit to use at your discretion. The main difference between a credit card and a personal line of credit is that the credit limit is usually higher on a personal line of credit, while the rates tend to be relatively lower than credit cards. You also won't need to submit a credit application every time you need to make a withdrawal.
Once you're approved, the funds are available for you to use when you need them. You are not charged against your entire balance, only on the funds you withdraw. Some personal line of credit loans are linked to debit cards, allowing additional flexibility on how you use the funds.
How to compare your line of credit loan options
If you're considering a line of credit loan, it's important to compare your options and find the loan that's right for you. Here are some features to keep in mind when considering the products available:
- The interest rate. Not only will you want to compare different interest rates, you will also want to learn how they are calculated. Check that interest is only being applied on the funds you have withdrawn, not on your total balance. Keep in mind that in some cases, you may have the option of securing the loan against an asset, which could result in a lower interest rate.
- The fees. Compare fees carefully as they are not always set out clearly. While a personal line of credit may advertise no annual fee, there could be monthly fees or an establishment fee that will result in an increase in the overall cost of the loan. Make a running list of fees for each product you are considering and factor that into your loan amount. You can use a personal loan calculator to do this.
- Repayment terms. There are two types of personal lines of credit. There are term-plan line of credit loans in which you have a certain time frame (usually one to five years) to pay off the amount you borrowed. The other type of line of credit loan will allow you to keep the loan open so long as you continue to make regular monthly repayments. This is known as revolving credit and might be appropriate for those who want a funding source available as a safety net for unexpected expenses.
- How accessible your funds are. Another thing to consider with this type of loan is how you will access your funds. Again, read the terms carefully. While a bank may offer a card that you can use at ATMs, there could be charges applied for this convenience. You are going to want to weigh the methods of accessing the funds along with any fees associated with them.
Things to consider
- You're (usually) only charged for what you use. In most cases you will only be charged interest on the funds you have borrowed, not the total loan amount.
- You can have easy access to your funds. If your account is linked to a card, you are able to draw the funds you need through ATMs and online banking.
- There are flexible terms. You can use the funds how and when you want.
- Fees and charges. Be mindful that fees and charges will likely apply, such as an annual fee, establishment fee or a monthly service fee.
What are the risks?
- Overspending. For some individuals, access to a large amount of credit may cause them to make unnecessary or otherwise unaffordable purchases.
- Penalties. While the repayments on a line of credit loan are generally flexible, you should make sure that you read the terms carefully. Most will expect at least monthly repayments and may charge penalties if that requirement is not satisfied.
How you can apply
You can use the table found on this page to begin comparing your personal line of credit loan options. The eligibility criteria will differ between lenders, so make sure to check this carefully before submitting your application. However, you will generally be asked to provide the following information:
- Income. You will have to show proof of an ongoing steady income. Your payslips are usually acceptable or a bank statement that shows consistent deposits from an employer.
- Liabilities. You will need to provide a complete list of your current debts.
- Identification. All lenders will need to see a current and valid photo ID of the applicant, and in most cases, you will need to provide a photocopy for their records.
- Assets. Information regarding your home if you are a homeowner, plus any vehicles you own and any savings and investment accounts in your name.