A personal loan is more flexible than a personal loan and offers a significantly lower interest rate than a credit card.
Why don’t you hear about it more often?
For one, it’s harder to qualify for a personal line of credit, or PLOC, which works much like a credit card. So it’s probably not an option for those who don’t yet have good credit scores.
Also, using a PLOC isn’t as easy as swiping a card. Using a PLOC may require transferring funds to your bank account or even writing a check. “I don’t think having a personal line of credit is as convenient as having a credit card or other payment options,” said Suzie Kisslan, chief operating officer at Credit Union of Southern California.
However, that doesn’t mean you should ignore the potential benefits of opening a PLOC. For those with strong enough credit to qualify, a PLOC gives you access to funds at potentially much lower interest rates than credit cards. And the application process is similar to that of a personal loan. “A PLOC is good to have as a backup – you don’t have to resort to it, but it’s nice to have when the unexpected happens and you don’t have a significant emergency fund,” says Leslie Tayne Esq., Lawyer and founder of Tayne Law Group, one New York law firm specializing in debt relief.
If you are considering opening a personal line of credit you should be sure that it will suit your needs. Here are some of the pros and cons of using a PLOC.
What is a personal credit line?
A PLOC is an unsecured, revolving loan that you can get from a lender such as a bank or credit union. You can borrow credit up to a pre-approved limit, but you only pay interest on the amount you are currently borrowing. So if you are eligible for a $ 3,000 PLOC but only withdraw $ 300, you will only pay the $ 300 of interest until it is repaid. And when you repay what you borrowed, you can borrow that money again. In this way, it works much like a credit card.
You can usually access PLOC funds by writing a check or transferring the funds to your bank account. Once you borrow from a PLOC, you must make a minimum monthly payment.
A personal credit line can be open indefinitely or expire after a few years. This is known as the drag period. If it expires, you will need to reapply for a new PLOC.
How to find the best PLOC
The application process for a PLOC is similar to that of a personal loan. And as with any loan, the rate and terms depend on the lender and your creditworthiness.
It’s important to find the best deal on a PLOC as the specifics of how PLOC works vary widely. You should look at the interest rate, repayment process, and fees. “With a personal loan, the terms are really important … you can’t just look at the bottom line of how much you can borrow,” says Tayne.
Terms of repayment
The repayment terms of a PLOC are similar to those of a credit card. When you make a withdrawal on your PLOC, you need to start with the monthly payment. These payments can be a fixed amount or change as you use more of your available balance when calculated as a percentage of your balance.
Also, if the PLOC has an expiration date, find out what the repayment terms will be if you have a balance after the line of credit has expired. You want to avoid a PLOC, which could require what is known as a balloon payment, in which the balance is due in one lump sum.
With interest rates as low as last year, finding a fixed rate PLOC is ideal. Unfortunately, most PLOCs have floating rates. But that doesn’t necessarily mean you’re doing bad business. If you only need a PLOC for a short period of time, it is possible that you will never be affected by a tariff adjustment. So when buying the best interest rate, pay attention to when the interest rate resets and how often it can change after the initial adjustment.
You should find out what fees the lender is allowed to charge. Some PLOCs charge a registration fee, have annual maintenance fees, and may even have an early repayment penalty. But none of these fees are standard for every PLOC, so it is important to compare the fees.
When a personal credit line can be useful
One of the greatest advantages of a PLOC is the flexibility to borrow only what you need.
If you’re spending $ 10,000 on a home remodel and 50% of the bill is due up front and the other 50% is due after the job is done, a PLOC can be a cheaper option than an unsecured loan. With any type of loan, you would pay interest on the full $ 10,000 from day one. But with a PLOC, you only pay interest on the first $ 5,000 initially and postpone interest charges on the second $ 5,000 until the job is done and you’ve withdrawn the remaining money.
While nothing beats a healthy emergency fund, a PLOC can be a better last resort than a credit card as it is usually a cheaper way to get cash. Credit cards charge higher interest on cash advances in addition to cash advance fees. “People get emergency lines of credit and you never pay interest if you don’t take an advance on your line,” says Kisslan.
Use a personal line of credit as overdraft protection for your bank account so you don’t have to worry about overdraft fees.
You may even be able to set up a PLOC at your bank as overdraft protection. This will help you avoid bank overdraft fees and insufficient funds for payments that would otherwise not have been made.
When a PLOC doesn’t make sense
Without a strong credit rating, the likelihood that the interest rate you could qualify for for a PLOC would be higher and the same as what you would pay with a credit card.
If you then compare a credit card or a PLOC, you can avoid interest charges with a credit card by always paying your bill in full and on time. A PLOC begins collecting interest the day you make a withdrawal, so using it for everyday expenses is not a good choice.
Even if you have a healthy credit score, an unsecured line of credit will have a higher interest rate than a secured loan or other secured line of credit. So, if you have enough equity in a property, a home equity line of credit (HELOC) or a home equity loan might be a better option.
Aside from potentially being more expensive than other forms of credit, particularly secured loans, it can also be more complicated. Getting a PLOC isn’t as simple as other loans where you get all of the money in one big chunk and pay it back over a period of time. And it’s not as easy to use as a credit card. Therefore, it is often not worthwhile to set up and use a PLOC.