Personal line of credit: What it is and how it works

A personal line of credit (PLOC) offers a flexible way to borrow money. And while PLOCs are similar to credit cards and other lines of credit, there are some key differences.

Read on to learn about PLOCs, how they work, what they can be used for and more.

Key takeaways

• A PLOC is a revolving credit account.
• Like credit cards, PLOCs are unsecured and have variable interest rates.
• A PLOC is typically used for things like home improvement projects or emergency expenses.

A PLOC is a form of revolving credit that can be used and paid down repeatedly, up to the line’s credit limit, as long as the line of credit remains open and in good standing. PLOCs are typically offered by banks and credit unions and, as the Consumer Financial Protection Bureau (CFPB) explains, usually require a borrower to have a checking account with the same financial institution.

PLOCs function similarly to credit cards and, like many credit cards, are unsecured and may have variable interest rates. Unlike credit cards, however, PLOCs aren’t open-ended. Instead, they have a specific draw period during which the borrower can use the line of credit. Once the draw period expires, the borrower has to ensure the line of credit is paid back in full. The borrower then has to reapply in order to keep the line open.

As the CFPB explains, a borrower uses a PLOC by writing special checks or requesting a transfer to their checking account. Then the borrower receives a monthly bill from their bank or credit union and has to make monthly minimum payments based on what they borrowed.

“You will pay less in interest if you consistently make more than the minimum payment,” notes the CFPB. And if the bill is paid in full each month, the borrower may be able to avoid interest entirely.

Keep in mind that a financial institution may charge an annual fee for a PLOC. And the borrower may be charged a fee each time the PLOC is used.

Depending on the specific terms and conditions of the loan, various fees may be assessed, including but not limited to: 

• Application fees
• Origination fees
• Annual maintenance fees
• Cash advance fees
• Late payment fees

Like a home equity line of credit (HELOC) or personal loan, a PLOC is typically used for things like home renovations or emergency expenses—like unexpected medical bills.

Ultimately, however, it’s up to the borrower. 

Like any financial product, PLOCs come with pros and cons:

There are some potential advantages of PLOCs to keep in mind when deciding whether one is right for you. These can include:

• Easy access to funds
• Relatively low interest rates
• No collateral required
• Can be used for overdraft protection

There are some potential disadvantages of choosing a PLOC, though they may not be downsides to everyone. These include:

• Qualifying with low credit scores or poor credit history can be tough
• May be subject to fees
• Not open-ended and requires reapplying at the end of the draw period
• Borrowers may be required to pay off the entire PLOC balance annually

PLOCs and personal loans are similar because they both allow you to borrow money from a lender without collateral. But each works a bit differently.

A PLOC is a revolving line of credit—typically up to a certain limit—that often has a variable interest rate. On the other hand, a personal loan is a fixed amount of funds usually distributed as a lump sum. Personal loans generally have a fixed interest rate, which means the monthly payment stays the same over the course of the loan.

Whether a PLOC is right for you ultimately depends on your own unique circumstances and financial situation. Those with less-than-perfect credit may have a tough time qualifying for a PLOC, as they’re typically geared toward those with good credit to excellent credit. And if you’re considering a PLOC, it’s worth keeping in mind how the monthly payments and potential fees will fit into your budget.

Ultimately, a trusted financial expert can help you determine whether a PLOC—or a different financial product—is right for you.

There are a few different types of lines of credit (LOCs) besides PLOCs. Take a closer look at a couple:

A HELOC is a secured loan because you can borrow funds against the equity in your home. Borrowing funds using a HELOC tends to be riskier because if you fail to make payments, your home could be foreclosed on. But because a HELOC is backed by your home, interest rates tend to be lower than those of other unsecured loans, like PLOCs.

A business line of credit works like a PLOC but is geared toward business use rather than personal use. For example, a business may need to access money to fund a short-term company loss or to purchase inventory or equipment. Business lines of credit tend to have higher loan limits than PLOCs do.

A PLOC can be a useful tool to provide funds when you need them most. Like any financial product, PLOCs come with their own pros and cons. Whether a PLOC is right for you depends on your own personal circumstances.

To learn more about other ways to access funds on a revolving basis, read up on how PLOCs compare to credit cards.