Is a personal line of credit a better fit than a personal loan?

Summary

It is when you don't know yet how much you'll need or when. A line of credit lets you draw money as costs come up and pay interest only on what you've used, while a personal loan hands you the full amount on day one and starts charging interest on all of it. The trade-offs are a rate that usually floats, a possible annual fee, and approval standards the CFPB describes as usually requiring strong credit.

Borrowing once versus borrowing as you go

An installment loan is what the CFPB calls closed-end credit. You get one lump sum up front and repay it on a fixed schedule, usually with the same payment every month.

A personal line of credit, in the CFPB's words, is "a loan that you access from time to time." You write special checks or move money into your checking account by phone or online. It behaves much like a credit card account. There is a credit limit, a monthly bill, a minimum payment, interest on whatever balance you carry, and possibly a fee each time you use it.

What one bank's line looks like

PNC publishes the terms for its unsecured personal line of credit:

Line amounts from $1,000 to $25,000 ($5,000 maximum in California), with a minimum draw of $50.
A variable rate based on the Wall Street Journal prime rate. The page doesn't list the rate itself.
A $50 annual fee and no prepayment penalty.
A continuous draw period, so the line doesn't close after a set number of years.

You can draw by check, online, by phone, or at a branch, and PNC lets you link the line to a PNC checking account for overdraft protection. Applications go through a phone call or a branch appointment.

Who gets approved

Because there is no collateral, the CFPB says these lines usually require strong credit, and most banks and credit unions set the limit based on your credit standing and income. They also tend to require a checking account at the same institution. Some online installment lenders take a different approach and say applicants with bad credit may still qualify, at a much higher price, as the bad-credit article shows.

Compared with a home equity line of credit, your house isn't at risk. The CFPB's HELOC brochure lists the flip side as a disadvantage of personal lines: a higher interest rate than a loan that uses your home as collateral.

Comparing the cost

The CFPB's shopping advice for lines of credit covers the APR, whether and how much it can change, fees to access the line, annual fees, late fees, and fees for other events, and it suggests comparing those costs with other kinds of credit available to you. For an installment loan, the amount, APR, and term produce one monthly payment and one total, which is what the calculator on this site works out. A line of credit has no single answer until you know how much you'll draw, when, and where the rate goes.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pricing pages on the dates shown. We have not used these products. Corrections: contact form.