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How to shop for personal lines of credit
When you have an unexpected expense, you don’t have the cash for, or when you’re behind on your bills, you may think the best solution is your credit card.
But opening a credit card can be a hassle, and it may not be the best way to get access to money when you need it the most. Getting a personal line of credit can be a smart option.
When it comes to choosing the best personal line of credit, it pays to understand what it is and how it differs from a personal loan. It also pays to compare rates.
Here’s an in-depth look at how personal lines of credit work and how you can find the best one.
What is a line of credit and how does it work?
A personal line of credit is similar to an unsecured credit card. You don’t have to provide collateral to take one out, like you do with an auto loan or a home equity loan. (You might provide collateral to get a better rate, though. More on this later.)
With a personal line of credit, a lender will pre-approve you to borrow up to a maximum amount. You can take out as much money as you need — up to your line of credit maximum — at any given time. You generally get access to funds by writing a check, getting an electronic transfer, or (sometimes) using an ATM card.
Once you take money out, repayment starts right away, and you’re only charged interest on the amount you’ve taken out. Lenders typically set a minimum payment amount, and interest rates are often variable, meaning they can go up or down depending on the prime rate.
You may also need to pay an annual fee for an account, and you’ll need to pay this fee whether or not you borrow any money.
What is the interest rate on a personal line of credit?
Interest rates for personal lines of credit vary dramatically by type, lender, and credit score. One lender may offer rates as low as 7% APR. Another may charge as much as 450% APR. Banks and credit unions tend to have lower rates but more stringent eligibility requirements.
In general, rates tend to be lower than what you could get with a credit card. Borrowers with poorer credit, however, may have to accept subprime rates reaching three figures. Your rates will vary depending on your credit score, the amount you borrow, and the lending laws in your state.
Of course, it doesn’t matter how low your rates are if you can’t afford the payments. So, make sure you only borrow as much as you can afford to repay.
If you can’t pay back your loan on time, you may have to pay penalties and risk damaging your credit score. Before taking out any loan, play around with a line of credit calculator to see what your monthly payments could be.
What is the difference between a personal loan and a line of credit?
As mentioned before, a personal line of credit lets you borrow as much you need up to a maximum amount. Since it’s a variable interest rate, your payment will vary as well. For an in-depth analysis of the pros and cons of a personal line of credit, read this SuperMoney article.
A personal loan is different in that you get a lump sum up front, typically with a fixed interest rate. That means you know exactly how much you’re paying each month. People who take out personal loans tend to use them to consolidate high-interest debt, such as credit card debt.
Personal loans are best for those who have a set amount they want to borrow. Lines of credit are best for those who want to have money available in case of emergencies or for overdraft protection.
Here is a list of the benefits and the drawbacks to consider.
- You only have to borrow the money you need.
- Only pay interest on the money you actually borrow.
- Flexible repayment options.
- Constant access to funds.
- Typically you qualify for a lower average APR than with credit cards.
- Unsecured credit lines risk no collateral.
- Option to provide collateral for lower interest rates (secured loan).
- Fewer restrictions on the loan purpose.
- Ideal for long-term projects with open-ended costs.
- Good for temporary cash shortfalls.
- No withdrawal limits (up to credit limit).
- You can’t deduct the interest as an expense.
- If the credit line has a variable rate, which is typical, the amount you owe may increase.
- Some lenders charge annual or monthly maintenance fees.
- Fixed-rate loans tend to have lower rates.
- Not a great option for debt consolidation.
- Fees and APRs vary widely by lender.
- Some lenders require you to have a checking account with them.
- You need good credit (although some lenders do cater to customers with poor credit).
- Not a great option for long-term cash shortfalls.
- Some consumers may be tempted to overspend.
- High credit usage could hurt your credit score.
How can I qualify for a line of credit?
Qualifying for a line of credit typically means you need a great credit score. Many lenders are more willing to offer you a line of credit, and at a lower rate, if you have that great score.
Before applying, check your credit score and credit report to see what you may be able to qualify for. Many places offer free credit monitoring tools, so take advantage of those services.
You can get a free credit report from the three major credit reporting bureaus each year by going to AnnualCreditReport.com. Once you get your reports, look over them closely to see if there are any discrepancies or errors. If there are, get them fixed before applying for a loan.
Once you know what your credit score is, you can confidently shop around for a line of credit. It doesn’t hurt to call your local credit union to see what they may be able to offer. These places tend to have lower rates.
If your credit score is less than stellar, don’t worry. You may still be able to get a personal line of credit with a favorable rate with lenders that cater for subprime borrowers.
As well, some banks are more willing to work with existing customers, especially those who have been loyal or have large deposits in their accounts. Your bank may be able to give you rate discounts or even waive annual fees, depending on the type of customer you are.
How should you compare personal lines of credit?
So you’ve decided to look for a personal line of credit. With so many options, how can you choose? What makes one credit line better than another? What factors should you consider when you compare personal lines of credit?
Having a bunch of options is great. But it’s easy to get overwhelmed and confused when you have too many choices. Don’t worry. SuperMoney has you covered. Read on to learn what factors you should consider when comparing personal credit lines.
Each lender’s offering is different. To find the best fit for you, shop around and compare the following factors.
- Credit line amount.
- Draw period.
- Annual percentage rate (APR).
- Eligibility requirements.
- Quality of service.
- Time frames for funding approval.
- Collateral requirements.
- Geographic availability.
Here’s a closer look at each of these factors.
Factors to help you compare personal lines of credit
Get answers to these questions before you decide on a personal line of credit.
What is the credit line amount?
Lenders offer a wide range of credit line amounts — anywhere from $100 to $500,000.
For example, one lender may only offer credit lines from $200 to $1,000. Another may have lines of credit from $25,000 to $500,000.
The goal is to find a lender whose range of credit lines suits your needs.
What is the draw period?
A credit line’s draw period is the period of time during which you can use it. For example, if you get a personal line of credit with a 10-year draw period, you can draw from that credit line for 10 years.
When the draw period ends, your credit line will close and you’ll enter the repayment period. During that period, you’ll have a set amount of time in which to repay the outstanding balance.
How does the draw period work?
- When you borrow against your credit line during the draw period, you’ll accrue interest on your balance until you’ve repaid it in full.
- If you have an outstanding balance during the draw period, you’ll only have to make minimum payments each month.
- If you make only the minimum payments, however, your growing balance will accrue more and more interest.
- Whenever you make a payment during the draw period, that payment returns to the credit line, where you can borrow it again.
If you are looking for a short-term solution, a shorter draw period will be a better fit. If your need for credit is long-term, you’ll want a longer draw period.
What are the annual percentage rates (APR) of personal lines of credit?
A personal line of credit’s annual percentage rate (APR) indicates the annual cost of borrowing. For example, if you have a 5% APR, you will pay $5 each year for every $100 you borrow.
Fixed and variable rates
APRs for personal lines of credit can be fixed or variable. Fixed rates don’t change over the term of your credit line. They often start higher than variable rates but remain consistent, offering more security.
Variable rates change throughout the lifetime of the credit line. These often start lower than fixed rates but fluctuate with the market and can end up higher over time.
Each lender offers a range of APRs. APRs for personal lines of credit can be as low as about 6% or as high as 400%. The lenders with the highest APRs cater to higher-risk borrowers with poorer credit. These lenders usually offer low credit line amounts.
The APR you get depends on each lender’s assessment of your creditworthiness. Most lenders use unique algorithms to consider multiple factors about borrowers and provide a quick decision. Common considerations include your credit score, credit report details, annual income, and employment situation.
The less risky a lender considers you, the better the APR you will get. And because lenders don’t advertise which factors they prioritize, you’ll have to shop around to find the best deal available to you.
What are the eligibility requirements to get a personal line of credit?
The eligibility requirements for personal credit lines vary from lender to lender. As a result, one will likely be a better fit for you than another. Common requirements include:
- U.S. citizen, permanent resident, or living in the U.S. with a valid visa.
- At least the minimum age for consent.
- Minimum credit score.
- Minimum credit history.
- Good record of credit usage.
- Minimum annual income amount with proof.
- An active and valid checking account.
- A valid e-mail address.
It’s smart to check the eligibility requirements when vetting a lender. You don’t want to waste time with lenders who cater to less qualified applicants or who have higher requirements than you can meet.
What are the fees for personal lines of credit?
Fees vary from one lender to the next. Below are the common fees that you’ll encounter with personal lines of credit.
- Origination fees are for processing, underwriting, and funding a credit line. They typically range from 0.5% to 5% of the loan amount. Say you get approved for a $6,000 line of credit with a 3% origination fee. In that case, the fee will cost you an extra $180. Not all lenders charge this fee.
- Draw fees: some lenders charge these each time you withdraw from your credit line. This fee may be fixed, or it may a percentage of the draw (typically 5% to 15%). This fee can become expensive over time, so you should look for the smallest one you can find.
- Prepayment fees are amounts that you have to pay if you pay off your credit line in full before the draw period ends. Like origination fees, not all lenders charge this fee.
- Late payment fees: lenders charge these if you do not make your minimum payment amount on time. Most lenders charge late payment fees, but the fee amounts vary.
- Annual fees: some lenders charge these fees on open credit lines. If your lender charges an annual fee, you will have to pay it each year.
When you compare personal lines of credit, it’s important to look at these fees. They will have a significant effect on your overall loan cost. The fewer fees a lender charges, the better.
What is the company’s customer service like?
The quality of service a lender provides will affect your experience and level of satisfaction.
For example, say you make a payment, but it doesn’t post. You’ll need to contact customer care. In this situation, the quality of customer service becomes important.
Will they be efficient, polite, and effective? Will they, at least, be able to fix the problem? If the issue doesn’t get resolved, you’ll likely have to pay a late payment fee, and the missed payment could hurt your credit report.
In situations like these, a competent customer service team is crucial. Does the lender you’re considering have one? The disposition of a lender’s customer service representatives can also influence your experience.
To find a lender with great customer service, read reviews by prior customers.
What are the time frames for approval and funding?
How much time does it take for a credit line to get approved and funded? It varies from one lender to the next. Some lenders approve you the day you apply. Others take five business days or more.
Additionally, once you’re approved, some lenders will make your funding available in as little as one business day. Others take a week or more.
If you need access to the credit line right away, make sure you choose a lender that approves and funds credit lines quickly.
How can you access your money with a personal line of credit?
How would you prefer to access your credit line? Lenders offer a variety of options. For example, some ask you to submit a request to transfer money to your bank account when you need it. Others simply give you a credit card.
When comparing lenders, consider the accessibility of the credit line, and make sure that it suits your needs and lifestyle.
Does the personal line of credit require you to provide collateral?
Some lines of credit require collateral to secure the loan. A few examples of collateral are an investment account with a minimum amount of funds, a home, and a business property.
Because collateral reduces the risk for the lender, secured credit lines often offer higher credit line amounts and lower APRs.
With an unsecured credit line, on the other hand, your APR and credit line amount are determined by your creditworthiness alone.
So, if you have an asset that you can use as collateral, prioritize lenders offering secured credit lines. These will get you the lowest interest rates, even if you don’t have stellar credit.
Where can you access personal lines of credit?
Not all lenders serve all states. Before applying for a credit line, check the lender’s service area to confirm it includes your state.
By shopping around and considering these factors, you will gain a comprehensive understanding of the offerings available and which suit you best.
Review and compare lenders to find the best personal credit line for you
The right personal credit line is the one that meets your needs at the lowest possible cost. You also need it to have a suitable draw period and a convenient method of access. The goal is to find a line of credit you are eligible for that has competitive APRs, fast funding, and affordable minimum payments.
Doing research on lender websites can be confusing and misleading — they’re looking to sell, not to educate. Instead, read honest customer reviews of the leading lenders in the market. Below, you can review and compare them side-by-side, read our expert articles, and read reviews from actual customers.
Check out the comparison tools above to speed up your research process and get the credit line you need.