What is a personal line of credit?

A personal line of credit is a revolving line of credit that allows you to access a set amount of money – your credit limit – for a fixed window of time. It’s a kind of loan you can borrow from as needed over a set period and pay back with interest. This is different from a personal loan, which allows you to borrow a lump sum at once and repay the full amount over time. Let’s look at how personal lines of credit work, how to get one and alternative financing options.

How does a personal line of credit work?

Personal lines of credit usually have a draw period and a repayment period.

After you open a personal line of credit, the draw period begins. This is the fixed window when your line of credit is available to you, and you can use the funds. When you make payments during the draw period, you can free up some of the credit to borrow again.

Once the draw period ends, you’ll begin the repayment period. During the repayment period, you no longer have access to the line of credit and must pay back what you borrowed plus accrued interest.

How do payments work for a personal line of credit?

How payments work depends on the lender and structure of your personal line of credit.

Most commonly, you’ll have a draw and repayment period. During the draw period, you’re typically required to make minimum monthly payments. Once the draw period ends, the repayment period begins. You’re generally required to pay off the full balance by the end of the repayment period.

Some personal lines of credit only have a draw period. You’re required to make one balloon payment at the end of the draw period and pay the balance in full. You might also have a continuous draw period, which means you can continue to borrow from and repay your line of credit, much like a credit card.

Make sure to check the terms of your lender’s agreement to understand the pay structure.

How is interest charged on a personal line of credit?

Interest typically accrues immediately when you borrow from a personal line of credit.

A personal line of credit usually has a variable APR, which means its interest rate can change over time. Variable rate APRs tend to fluctuate with market conditions, which makes them less predictable. Ensure you understand how much a line of credit’s APR can change before applying.

How do you qualify for a personal line of credit?

To qualify for a personal line of credit, you must meet your lender’s standards for creditworthiness and income.  These standards can vary from lender to lender.

Benefits of a personal line of credit

Personal lines of credit offer many advantages, including typically quick access to funds that can be used for a variety of expenses.

Flexible access to funds

Personal lines of credit allow for flexibility, which can be useful if you don’t know how much you need to borrow. You can borrow against your credit limit in any amount and at any point during the draw period.

Pay interest only on the funds you use

A personal line of credit comes with an interest rate, which is usually variable. But this rate only applies to money you borrow – not the full credit limit. In other words, if you take out a personal line of credit and never use it, you won’t owe any interest.

For example, if you’re given a $10,000 line of credit and you only use $2,000 of it, you’ll only have to make payments on the $2,000 you borrowed. You can also use the line of credit multiple times, as long as you don’t exceed your limit.

Use funds for almost anything

The funds from a personal line of credit can be used for almost anything. You could use some to remodel your bathroom and some to make a large purchase.

No collateral required

Personal lines of credit are unsecured, which means you don’t have to put up a personal asset, such as a car or home, as collateral.

Alternatives to personal lines of credit

A personal line of credit isn’t the only way to borrow what you need. Here are some alternatives.

Credit cards

Like personal lines of credit, credit cards provide access to a line of credit. Credit card accounts typically stay open until you close them, although the issuer may close the account due to inactivity. So you may have access to your credit limit for longer than a personal line of credit.

 Some new credit cards come with low intro APR offers on balance transfers or purchases that last for a specified period. This can make them a good tool for consolidating debt or making a big purchase, if you can pay off the balance by the end of the intro period. 

Personal loans

When you take out a personal loan, you receive a lump sum upfront and pay it back in monthly installments. A personal loan could be the right option if you know how much you need and can budget for the required monthly payments.

Home equity lines of credit (HELOC)

A home equity line of credit works similarly to a personal line of credit, but it lets you borrow against the equity in your home. A HELOC is a secured loan – your home is collateral – and it has a variable interest rate.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.