What Is a Personal Line of Credit?

ByClemence Norma

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Wells Fargo started this week informing consumers that they would be withdrawing their personal loan product. In letters audited by CNBC, the bank said it was shifting its focus to credit cards and personal loans.

They also stated that for consumers who currently have a personal line of credit with the bank, their creditworthiness may be impacted if the product is discontinued. This short-term announcement has angered consumers and critics of the banking industry alike.

But what exactly is a personal loan? Select walks you through what you need to know about the product, including the pros and cons, and what to consider when applying, so you can choose the product that best suits your needs.

What is a personal loan?

A personal line of credit, sometimes abbreviated as PLOC, is a fixed amount of credit that is made available to you by a financial institution over a period of time. Many consumers use a personal line of credit to help consolidate debt, expand their business, pay medical bills, refinance existing debts, renovate their home, and more.

A personal loan is something of a cross between a credit card and a personal loan. However, there are some distinguishing features:

  • A personal loan can allow you to receive funds in contingents, while a personal loan is a lump sum delivered all at once.
  • Interest is only due on the amount you have withdrawn.
  • Once the line of credit is paid back in full, you may be able to get the money back. This feature is not always available and is dependent on the lender.
  • Fees may be incurred with applying for and receiving the line of credit, including application fees or maintenance fees. This will vary from lender to lender.

Advantages and disadvantages of a personal loan

There are several use cases where a personal line of credit makes sense, while other scenarios may not. As with any personal financial decision, it is beneficial to explore all of your options.

advantages

A personal loan is a great way to raise capital. However, each lender can limit what you can use your money on, so be sure to check the lender’s terms and conditions. Here are some benefits of using a personal line of credit:

  • Access to funds: For example, if you have been approved for a balance of $ 50,000, you do not need to withdraw the entire amount. You can take out as much as you want, whenever you want. The entire credit line is available to you during a “drawing period”.
  • Strategic usability: Similar to a personal loan, you can use the funds to refinance debts such as student loans or a car loan. For example, if you have a $ 20,000 car loan and a $ 10,000 student loan, you can apply for a $ 30,000 loan to pay off those two loans at the same time. This could potentially lower the amount of interest you would have to pay.
  • Flexible lending: Much like a credit card, the lender can refill access to your entire line of credit based on the repayment. This is sometimes referred to as an open credit transaction.

disadvantage

A personal line of credit is another type of loan product that has several unique advantages, but there are also some disadvantages to be aware of:

  • The risk of unsecured loans: A personal loan is considered an unsecured loan because no collateral is provided by the lender. This typically results in higher interest rates as the financial institution assumes all of the risk.
  • High credit required: Because the loan is unsecured and the line of credit can be hundreds of thousands of dollars in some cases, a credit rating over 700 is usually required.

Alternatives to personal loans

For consumers looking for extra capital to help them achieve their goals, a personal line of credit is one of many products to choose from. However, if you can’t qualify, don’t worry. Other lending options are available to consumers.

  • Personal Loans: The main difference between a personal loan and a personal loan is that a personal loan is a closed transaction. The lender will spend the funds and await repayment on a set schedule.
  • Credit cards: A credit card is more intended for short-term purchase financing, while a personal loan is intended for larger financial transactions and investments. Most credit cards have much higher interest rates than a personal line of credit, and expect high fees and interest rates if you don’t pay your entire bill every month.
  • HELOC: Abbreviation for a home equity line of credit, you can apply for equity to be used to finance your home. Since this is a secured loan, the interest rates are typically lower than a personal line of credit.

How to qualify for a personal line of credit

Qualifying for a personal line of credit is easy. Once you find a lender with a personal loan product that suits your needs, you will be asked for information about your current financial condition. This can include:

  • Bank statements
  • Investment portfolio
  • Employment history
  • Proof of income
  • Explanation of what the line of credit will be used for

Your credit score will also be checked, so be sure to monitor your credit score closely to make sure there are no errors.

Banks that offer personal loans

While Wells Fargo did away with the personal line of credit product, there are still a large number of banks offering the same. Each institution offers different loan amounts, terms, and fees. Therefore, compare between institutions to find the best one for you.

Bottom line

A personal line of credit can be used as a strategic tool to manage debt, grow a business, or renovate a home. While Wells Fargo has removed the product from their offerings, there are several other banks that are still offering it. And with the right interest rate and terms, a personal line of credit can be a helpful resource in your financial endeavors.

Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.