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

A personal line of credit (PLOC) is a type of loan that works similarly to credit cards. If a borrower is approved, a lender approves a certain credit limit, and then the borrower can access the funds repeatedly, paying them back with interest. 

What you’ll learn:

• A PLOC is a revolving credit account.
• Like many credit cards, PLOCs are unsecured and have variable interest rates.
• A PLOC could be used to pay for things like home improvement projects or emergency expenses.
• You might be able to apply for a PLOC at a bank or credit union, but you may need to be an existing customer or member.

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 must pay back the line of credit in full. The borrower then has to reapply 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 pay a fee each time the PLOC is used.

Depending on the specific terms and conditions of the loan, the PLOC may have various fees, including: 

• Application fees
• Origination fees
• Annual or monthly maintenance fees
• Late payment fees

Like a home equity line of credit (HELOC) or personal loan, a PLOC might be used for things like home renovations or emergency expenses, such as 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
• Possible use for overdraft protection

There are some potential disadvantages to choosing a PLOC, including:

• Tough qualification for borrowers with low credit scores or poor credit history
• Possible fees
• Having to reapply at the end of the draw period
• Potentially having 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 loan payments generally stay the same over the course of the loan.

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

A HELOC is a secured loan because it involves borrowing against the equity in a home. Borrowing funds using a HELOC tends to be riskier because of the risk of foreclosure from missing payments. But because a HELOC is backed by a 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.

Here are answers to some frequently asked questions about PLOCs.

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 circumstances.

If you’re looking for other ways to access credit, check out Capital One’s credit card options. You could also see if you’re pre-approved for card offers without harming your credit.