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While it’s always a good idea to have an emergency savings account, sometimes you need an extra layer of financial protection. A personal line of credit can give you access to quick cash—if or when you need it.
What is a personal line of credit?
A personal line of credit is a flexible loan that allows you to borrow money over time and use it however you like. It’s a bit like a credit card in that you don’t need to take all the money at once; you simply withdraw as much as you want when needed, up to the predetermined limit.
Because you can withdraw money, repay it, and then withdraw some more, a personal line of credit is called a revolving loan. It is different than a term loan like a car loan or a mortgage, where you get the full amount of the loan up front, all at once, and then you make a fixed monthly payment for a set amount of time until the loan is fully paid off.
How a personal line of credit works
When you get approved for a personal line of credit, lenders like Global will give you a credit limit. For this example, we'll say you were approved for $10,000. You can draw on that credit line—that is, withdraw money—as often as you like, up to the $10,000 limit. If you have a balance, once a month, you must make a payment. The amount of your required monthly payment depends on how much you’ve borrowed. So, if you’ve only withdrawn $3,000, your payment will be lower than if you’ve used $5,000 of your credit line.
You will be charged interest as soon as you borrow the money, but you’re only charged interest on the money you’ve borrowed. You can repay it all at once or over time; you can also borrow and repay as you go. This means that once you’ve paid down a portion of the personal line of credit, that amount becomes available for you to borrow again.
When should I get a personal line of credit?
A personal line of credit can be a valuable financial tool to help you pay for unexpected expenses or to cover gaps in regular monthly income, for times when cash flow is uneven or delayed. It is especially helpful for people who are self-employed, or those with seasonal jobs where income varies during the year.
For example, if you work on commission, some months of the year may be better than others for your income. A personal line of credit can cover your expenses during those months when your commission income is lower. Then, when you’re earning more in commission, you can use the extra income to pay back your personal line of credit.
This type of loan can also be helpful when you need to pay estimated quarterly taxes, when you’ve got a delay between when income is received and when taxes are owed. It can even be used to consolidate high interest credit card debt, cover emergency expenses—an unexpected car repair, for example—or used as overdraft protection for your checking account.
A personal line of credit is not intended for one-time purchases, such as a car or house. Regular term loans like car loans and mortgages are much better for these expenses since they carry a lower annual percentage rate (APR), and you get the full amount of the loan up front when you need to make the purchase. And while a personal line of credit can be used for a home improvement project, you may be better off using a home equity line of credit (HELOC) for this, because the APR on a HELOC may be tax deductible while interest from a personal line of credit is not. Contact your tax advisor for more information.
How big can a personal line of credit be?
Personal lines of credit offered at Global typically range between $500 and $20,000, but larger amounts could be available for qualified applicants. Your application for a personal line of credit will be evaluated based on your creditworthiness.
What qualifies you for a personal line of credit?
Generally, you need strong credit, making this type of loan a better choice for people with a higher FICO credit score. When you apply, you may need to show an established earnings record and proof of employment.
When you apply for a personal line of credit with Global, we may consider several factors which could include checking your credit, employment status, income, or monthly expenses. We require that you have an existing account with us, but that account can be opened after you apply for the credit line.
Closed end loans vs. open end personal credit lines
With a closed-end loan, you get the full amount of the loan up front and then you make regular, scheduled payments within a certain amount of time until the loan is fully paid. Once you pay off the loan, the account is closed. A closed-end secured loan typically carries a lower APR.
A personal line of credit is an open-end loan. An open-end loan can be used over an unlimited period of time; you can borrow against the credit line up to a certain limit, pay it down, and then borrow again. Your monthly payments depend on how much of the credit line you’ve used. A credit card is another example of open-end credit. Both let you borrow as needed, up to your credit limit.
Comparing personal lines of credit with other credit sources
1. Personal loan
With a personal loan, you get all the money at once, and then you pay interest on the entire amount of the loan. You pay the same amount every month until the loan is paid in full. You have a fixed APR. With a personal line of credit, you withdraw money as you need it, and only pay interest on the amount of money you’ve used. The amount you pay on a personal line of credit each month varies according to how much money you’ve withdrawn.
2. Credit cards
A personal line of credit operates much like a credit card. Both have preset limits, and you can use the money anytime you wish to pay for whatever you like. You pay no interest until you use it, but a credit card has no interest charge if you pay off the balance in full each month, while a personal line of credit charges interest the moment you withdraw the money. Credit card cash advances often have fees associated with each withdrawal.
3. Home equity line of credit (HELOC)
A HELOC is a secured loan (it uses your home as collateral), while a personal line of credit is usually unsecured. You can withdraw funds from either a HELOC or a personal line of credit whenever you like. Interest on a HELOC is usually lower than for a personal line of credit. The interest on a HELOC may be tax deductible if the money is used to improve the value of your home, but interest paid on a personal line of credit is generally not tax deductible. Consult your tax advisor for more information.
How long does it take to get approved for a personal credit line?
At Global, we can usually have a decision for you within one or two business days. You can apply online or in a branch, and once approved, you have the choice on how you’d like to close your loan—online, by mail, or in one of our branches. We make it easy to access the funds from a personal line of credit: you can withdraw money from a local branch, or you can transfer money from your credit line into your checking account.
