There are many different types of personal lines of credit, but they all follow the same basic premise: these loans allow a borrower to take out the money in increments as small as $100 and up to an unlimited amount per month. Personal lines of credit allow borrowers to borrow cash for medical emergencies, car repairs, home improvements, and other unexpected expenses.
Right now, personal lines of credit can also be used for more than once-a-year purchases like annual holidays or vacations that you want to be sure you can afford.
Borrowers can pay the interest on their line of credit or let it ride, which lowers their regular monthly payments. However, a downside to letting the credit sit idle is that interest rates may go up.
There is no maximum amount you can borrow with a personal line of credit, but how much you borrow depends on your income and other factors, such as your credit history.
As with any loan, borrowers should be careful to pay down their lines of credit on time. An unpaid line of credit could result in interest charges and fees. Borrowers should also be aware that if they are late on payments or miss one, their lender could start charging penalties and fees as high as 5 percent per month.
Many people confuse personal lines of credit with credit cards, but these two loans are very different.
Personal lines of credit, also referred to as consolidated loan accounts (CLAs), are designed for long-term use, so the rates and fees tend to be lower than those on credit cards. Unlike credit card interest rates, the interest rates applied to CLAs are fixed throughout the life of the loan and may never go up. However, unlike a traditional installment loan, CLAs tend to have higher fees for missed payments or infractions than personal loans.
Like credit cards, CLAs are designed for short-term use. So paying off any personal lines of credit every month is essential. Failing to do so could result in high-interest rates and penalties as well as a higher cost of borrowing.
Credit card companies and banks typically have different rules regarding what can be paid with a credit card. With a personal line of credit, the same things that can be paid with an average loan (such as credit cards or other personal loans) are allowed with this type of loan.
However, certain personal lines of credit may have additional restrictions on what can be paid with the funds they provide.