Best Personal Line 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.
Common Questions
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.
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.
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.
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.
- Fees.
- Quality of service.
- Time frames for funding approval.
- Accessibility.
- Collateral requirements.
- Geographic availability.
Here’s a closer look at each of these factors.