Brainy Loans

What exactly is a personal line of credit, and how it works?

Definition of personal line of credit (PLOC)?

A personal line of credit is a flexible loan between a lender and borrower that creates a credit account the borrower can use as needed. Unlike other loans that have a set repayment period, PLOCs are designed to be used and repaid at the borrower’s discretion.

This loan is similar to credit cards, where the borrower has access to a certain amount and only pays interest on the amount borrowed. PLOCs are advantageous due to their flexibility and lower interest rates compared to credit cards. However, they typically require a higher credit score to be approved for larger amounts.

Since the loan is unsecured, there is no collateral required, and the borrower’s assets are not at risk.

How Does PLOC work?

Personal lines of credit are revolving accounts that are similar to personal loans because they offer flexible borrowing options to users.

However, unlike personal loans where you receive a lump sum and have to pay it back, with a PLOC, you can borrow and repay funds as you, please. Similar to credit cards, you only pay interest on the amount you use.

However, unlike credit cards, personal lines of credit typically have lower interest rates but may have expiration dates.

For example, let’s say you have a personal line of credit limit of $5,000 and you use $2,000 to purchase a new computer. You will only pay interest on the $2,000 you borrowed, not the full $5,000.

Then, let’s say a week later, you need to buy new shoes for $1,000. You still have $3,000 of your personal line of credit available to use. After you repay the borrowed amount, you can repeat this process until the line of credit expires.

Comparison of personal loans or personal lines of credit.

Both options involve taking out a loan from a lender. In most cases, personal loans and personal lines of credit require approval from the lender, and the approval criteria are often similar.

Additionally, both types of loans will have interest that you’ll need to pay to the lender. However, there are some key differences between the two loan products:

Personal Loans

Personal Lines of credit

Fixed interest throughout the life of the loan.

Will have a variable interest rate that can fluctuate depending on the market. 

Typically used for a specific reason.

Has flexible uses and can be used over and over. 

Has a required repayment period.

Has a flexible repayment period and the ability to borrow as you need.

Need to pay money on the full loan.

You’re only required to make payment on the money your using even if you approved for more. 

Get a lump sum of money when you are approved.

You get a credit limit like a credit card which you can use as needed.

Varieties of credit lines are available.

Just like any loan product, there are various offers available for personal lines of credit. You should evaluate each option and determine which one best fits your needs.

The most common personal lines of credit available include unsecured personal lines of credit, secured personal lines of credit, overdraft lines of credit, business lines of credit, and student lines of credit. Here is a breakdown of these personal lines of credit:

Unsecured Personal Line of Credit: This type of line of credit does not require any collateral to back it up. However, it usually requires a better credit score to get approved, and a higher income will help increase the credit amounts.

Secured Personal Line of Credit: This is a great option for individuals who might not be approved for an unsecured personal line of credit. A secured personal line of credit requires collateral such as a car, house, or any valuable item to get approved. While it is easier to get approved for, there is a risk of losing the item if you are not able to make the payments.

Overdraft Lines of Credit: These lines of credit are used for accounts to prevent individuals from over-drafting if they make a large purchase and do not have enough funds to cover the expense. The interest will be charged on the amount you are borrowing until it is paid back.

Business Line of Credit: These loans are primarily for business owners and are designed to provide funds for unexpected expenses.

Student Line of Credit: This can be a great option for students who need help paying for anything related to education such as textbooks, shelter, living expenses, tuition, tutors, and more. Unlike traditional student loans, they are flexible, and you only pay interest on the funds you use.

How does repayment work for Personal Lines of credit?

Since personal lines of credit are flexible, you’re offered a flexible way to repay the loan as well. You can either make a full payment of the amount you borrowed in one payment, or you can choose to make smaller payments over time as long as you pay the minimum amount required each month. This gives individuals the flexibility to make decisions that are right for their situation.

Advantages and disadvantages of personal lines of credit.

Just like anything in life, there will be plus and minus. Personal lines of credit could be an amazing option for one person but a terrible choice for someone else. Here are some differences for you to make a decision and see if its the right option for you.



You are able to borrow as you, please. 

Might have higher interest rates than other loans.

Access to funds as you need.

Will have more fees than other loan products.

Lower interest than credit cards.

The more strict approval process to get the loan.

Good options for unexpected expenses. 

Might have a withdrawal requirement forcing you to borrow more then you need to. 

Other options to consider instead of a personal line of credit.

If you find that a personal line of credit might not be the right solution for you. There are a few other loan products you should consider that might help you accomplish your goals such as personal loans, credit cards, home equity loans, payday loans, 401(k) loans, or maybe borrowing from a family. Before selecting a loan be sure to consider all the other loan options available for you and see which one will save you the most money.

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