A personal line of credit is a simple and convenient way to borrow cash in emergencies, but is it the right option for you? Keep scrolling to learn more about this borrowing option, so you understand how it compares to other financings.

What is a Personal Line of Credit?

A personal line of credit or personal LoC is an open-ended or revolving loan. This means you get approved for a credit limit, but you’re under no obligation to use all of it at once.

Instead, you draw funds from your account as you need it, and use as much or as little of your limit as you please.


How Does it Work?

Your payments are calculated according to how much you tap into these funds.

Let’s say you’re approved for a $2,500 limit. You can let it sit, untouched until you need help covering a bill, or you can use it right away.

Maybe your car breaks down unexpectedly, and you need a little help covering the bill. So you draw $1,000 to pay off these repairs.

This leaves you with $1,500 remaining until you pay off your balance. Once you do, you’ll have access to the full $2,500 again.

How Do Payments Work?

Interest starts to accrue as soon as you start using your account, so paying off your balance in full as soon as possible is an easy way to reduce how much you pay in interest.

Here’s some more good news: you only accrue interest on the outstanding balance and not the total limit.

This is one of the biggest differences between this product and a personal loan. With a loan, you typically get a lump-sum of money and start accruing interest on it right away.

With an LoC, there’s also the option to carry over a remaining balance from one bill statement to the next. If unexpected bills make it challenging to pay off your $1,000 balance in full, you can pay it back over multiple months.

Just make sure you pay the minimum payment each month. This builds positive payment history, which may help impact your score.


When Should You Use One?

There are a lot of reasons why you might be looking for a personal line of credit.

For example, if you accidentally step on your only pair of glasses, an LoC may be how you afford a new pair. This is why an LoC may be a better option than a loan in this situation. It lets you pay for your new glasses, and you’ll have cash in reserve without having to reapply in case another emergency comes your way.

Generally, most people use an LoC to help smooth out a rough financial patch. It helps them take on unexpected and emergency bills or repairs when money’s tight.

In many cases, your financial institution will advise when a LoC is right for you. If you visit, you’ll see they recommend a personal line of credit is ideal for emergencies. If you need help covering regular or expected bills, this option may not be right for you.

How to Get One

Getting an LoC is simple.

Each lender will have their own set of requirements, so you’ll have to research individual financial institutions to find out how to qualify for a personal line of credit.

Generally, you’ll need a good credit score to qualify, but not all financial institutions are the same. Some have less strict requirements and may approve people who have subprime scores.


Is it the Right Choice for You?

Everyone’s finances are different, so what makes a line of credit a great option for some people might make it a bad fit for others.

Check-in with your finances and research your options before you make a decision. These simple steps will help ensure its rates, terms, and conditions work with your budget.