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What is a Personal Line of Credit? Know Its Pros and Cons

James Albert by James Albert
April 29, 2022
in Money
0

Home » What is a Personal Line of Credit? Know Its Pros and Cons

If you’ve thought about improving your finances and want to consolidate credit card debt, or you’re looking for a way to borrow money for a major expense, you might’ve heard about the option of using a personal line of credit. But what is a personal line of credit, and is it right for you? Here are some things to consider.

Table of contents

  • What is a personal line of credit?
    • Is a personal line of credit just a credit card?
  • Pros of a personal line of credit
  • Cons of a personal line of credit
  • The bottom line

What is a personal line of credit?

A personal line of credit (PLOC) is a loan that you take out from a bank or other lending institution. You can use this loan to cover expenses such as a down payment on a house, medical bills, car repairs, or tuition payments.
The loan is unsecured and revolving, meaning that the bank can increase or decrease the amount you borrow based on your credit score and other financial factors. The interest rate on a PLOC is variable, meaning it can change based on current market rates.

Is a personal line of credit just a credit card?

Personal lines of credit work similarly to credit cards, but they’re not the same. PLOCs are set up like a bank account where you transfer cash out as needed, where a credit card is used to make purchases on credit. Credit cards do offer cash advances, but this is not the primary purpose of a credit card. If you need access to credit, a credit card is the better option. However, if you prefer having access to cash, a line of credit is what you’re looking for.

Pros of a personal line of credit

A personal line of credit offers the borrower a short-term loan against your current assets, which can be helpful in times of need. The pros of taking out a personal line of credit include:
You can borrow money quickly and easily, which can be helpful if you need to cover an immediate expense.
The interest rate on personal lines of credit is generally much lower than the rate on traditional loans, so you may benefit financially from using one if you’re looking to borrow money for an expensive purchase or investment.
Personal lines of credit are often less expensive than borrowing through a traditional lender such as a bank or credit union.

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Cons of a personal line of credit

While PLOCs are excellent resources for those who need a little cash infusion, there are also some cons to consider.
You may have to pay interest on the loan every month, which can add up quickly if you’re not careful.
If you don’t pay the debt off in time, your lending institution may declare the debt in default and seize your assets.
You may be limited in the number of loans you can take out with a personal line of credit, which could lead to trouble if you need to borrow money for an expensive purchase or investment.
PLOCs can also be risky if you don’t understand the terms and conditions of the loan. Make sure you fully understand what you’re getting yourself into before signing on the dotted line.

The bottom line

A personal line of credit can be a great way to get the money you need. However, it is crucial to understand the pros and cons before you apply.

James Albert

James Albert

James Albert is a personal-finance analyst for FintechZoom and is based in New York. Contact: [email protected]

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