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Personal line of credit loans are useful 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.
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'd need to do with a personal loan.
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.
Compare a range of personal line of credit loans
What's in this guide?
- What is a line of credit?
- What's the difference between a line of credit and a personal loan?
- Personal line of credit vs personal loan
- Compare a range of personal line of credit loans
- How does a personal line of credit loan work?
- Are personal lines of credit secured or unsecured?
- How to compare your line of credit loan options
- How to compare lenders
- What can I use it for?
- Things to consider
- How you can apply
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.
Are personal lines of credit secured or unsecured?
A personal line of credit can be secured or unsecured. Which option you go for will depend on your preferences, financial circumstances and whether or not you have an eligible asset to offer as security.
Generally, opting for a secured line of credit will increase your chances of approval, give you access to a lower interest rate and increase your credit limit (usually up to the value of the asset security). Eligible security usually includes assets such as vehicles and commercial or residential property.
Unsecured lines of credit do not require an asset as security. These loans will generally require you to have an excellent credit score, may be more expensive and you could have access to a lower credit limit.
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.
How to compare lenders
When it comes to finding the right personal line of credit, as well as comparing your loan options, you also have to consider what kind of lender you want to opt for. Different types of lenders offering personal lines of credit include:
Bricks-and-mortar banks such as the Big Four and others are an option for borrowers looking for a personal line of credit. Some individuals may prefer this as an option because they have a good longstanding relationship with their existing bank or they prefer face-to-face contact via a branch (something smaller lenders may not to facilitate). However, larger banks do tend to have higher rates and fees than smaller, non-bank lenders. They also usually require borrowers to have excellent credit ratings.
Credit unions and building societies
These are financial institutions, also known as "mutuals", that are member-owned and not run for profit. This means that any profits that are earned are put directly back into products and services. Standard financial products are usually on offer from these institutions, including personal loans. Like banks, credit unions and building societies tend to have branches. However, you are usually required to be a member in order to apply for finance (though this doesn't mean that if you aren't a member already, that you can't join).
Neobanks, also sometimes referred to as "online banks", source their own funding and make a margin on the difference. Often, neobanks will offer personalised interest rates to customers based on their financial circumstances and credit scores. Neobanks offer more competitive rates than their bigger opponents. Borrowers with less-than-perfect credit scores may also find it easier to be approved with a neobank (though they are unlikely to be offered the lowest rate). Neobanks don't usually have branches and are only accessible to contact via phone, email and live chat.
Some P2P lenders may offer personal lines of credit to successful applicants. P2P lenders are finance providers that facilitate a platform where investors finance a portfolio of personal loans and earn interest on what they lend, while borrowers are given an individual rate based on their credit score. Generally, P2P lenders don't have branches and can only be found online.
What can I use it for?
Personal lines of credit tend to be more flexible than personal loans, which means that you can usually use them for any purpose. Whether it's withdrawing cash from an ATM for groceries or paying for a luxury holiday, a personal line of credit can often cover it.
A major benefit to personal lines of credit is that they are flexible and available for multiple purposes, such as paying for your wedding, your honeymoon or some home improvements. Personal loans, on the other hand, are a lump sum payment and some lenders may limit you as to what you can use the funds for.
Things to consider
When looking for the right personal line of credit, you ought to consider the following:
- 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. These will usually be charged regardless of whether you draw down funds or not.
What are the dos and don'ts of a personal line of credit?
- Check your credit score. The better your credit score, the lower the rate you can likely qualify for. So, it's a good idea to be in the know about what sort of shape your credit score is in.
- Shop around. Finding the lowest rate and lowest fee loan possible will save you money.
- Check the fine print. Read the terms, conditions and eligibility criteria carefully before applying.
- Borrow realistically. Apply for a credit limit that is within your means to repay. Applying for too much might see your application rejected or make repaying the loan a struggle later down the line.
- Skip repayments. While the repayments on a line of credit loan are generally flexible, you should read the terms carefully and meet your repayments. Failing to do so could see you incur penalty charges or even legal action.
- Unnecessarily spend. Having a high credit limit might tempt you to overspend on purchases that you don't really need. Only use your line of credit for essentials.
- Use a personal line of credit for your business. If you're a business owner, using a personal line of credit to support your cash flow could be a mistake, as you risk putting your personal credit in jeopardy. Luckily, lines of credit are also available specifically for businesses.
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. 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.
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