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What is a Personal Line of Credit?

Chris Gottschalk

Chris Gottschalk About The Author

May 14, 2020 5:30:00 AM

Everyone knows how a loan works. You go to a financial institution and talk with a lending advisor about how much money you need. Once the lending advisor is confident you’ll be able to pay back the loan, you receive the money.

While loans can be a valuable tool to help you achieve financial success, there are some times you need more flexibility. Maybe you know you’ll need additional money, but you’re not sure how much you’ll need. Maybe you have a job with an irregular paycheck, and you need a way to cover expenses before your next paycheck.

If you’re in a similar situation, a personal line of credit might be the solution.


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How Personal Lines of Credit Work

Man and credit card | First Alliance Credit UnionA personal line of credit is like a loan in that you’re going to be borrowing money from a financial institution. However, when you apply for a personal line of credit, a lending advisor will not only determine whether to approve you or not—they’ll also figure out the maximum amount of money you’ll be able to borrow. They’ll make these decisions based on your financial information, such as your credit score, income, existing debt and other financial information.

If you’re approved for a personal line of credit, you’ll be able to borrow money up to the maximum amount for a set length of time, known as the “draw period.” This draw period can last up to several years. You can draw any amount you want, and you can use the money in any way you see fit.

You also don’t have to make any payments if you haven’t borrowed any money from your personal line of credit. However, once you have borrowed some money, you’ll need to repay the principal and the interest on the loan.

Most of the time, though, the repayments work like repaying a credit card. The financial institution will have a minimum payment you should make, which they will apply to the interest and the principal. The portion of your payment applied to the principal will be available for you to borrow again, similar to the way a credit card works.

Why Should You Get a Personal Line of Credit?

As we mentioned earlier, a personal line of credit is ideal for situations in which you know you’ll need to pay for something, but you don’t know how much it’s going to be.

Home remodeling and repairs are the best example of this. You might have an estimate on how much money you’ll need, but the final cost might turn out to be very different. A personal line of credit gives you the ability to deal with unforeseen expenses without draining your existing budget.

Personal lines of credit can also help when a sudden expense pops up. If your car needs a major repair or your pet gets sick, you can access your personal line of credit to finance the cost and pay it back over time.

If you’re in a job with an irregular paycheck, such as a contractor, you can use a personal line of credit to help cover expenses in between paychecks. This makes them an excellent alternative to payday loans.

It’s also worth pointing out that personal lines of credit allow you to withdraw cash from a financial institution instead of using a check, credit card or debit card. This can really come in handy when buying from a seller who doesn’t accept credit cards, such a person selling furniture on Craigslist.

Things You Should Know About Personal Lines of Credit

Personal lines of credit offer a lot of advantages over traditional loan. So why don’t more people get them?

Man shaking hands | First Alliance Credit UnionA personal line of credit is an unsecured loan, which means you don’t have to put up any collateral in exchange for the money. This is a bigger risk for banks and credit unions, so the institution needs to be sure you’ll repay the amount you owe.

The lack of collateral also means the interest rate will likely be higher than other loans, and the interest rates are usually variable. This means you’ll want to keep a close eye on the interest rate and make sure you know when it changes.

Finally, personal lines of credit at some banks may also come with fees beyond the interest rate. They may also charge maintenance fees, and some may even have penalties for paying off your loan too soon. You’ll want to read the terms of a personal line of credit agreement thoroughly to avoid over payment.

Get a Personal Line of Credit Through First Alliance Credit Union

Personal lines of credit are very useful financial tools. They can help cover unforeseen expenses, provide extra financial support between paychecks and finance projects that don’t have a solid cost.

If you think a personal line of credit might be right for you, become a First Alliance Credit Union member today. We offer a personal line of credit that offers no annual fees, no funds transfer fees and can even connect to your checking account to cover overdrafts.

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