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

If you have a large, ongoing or unexpected expense to pay for, a personal line of credit (PLOC) can be an option. It’s a type of revolving credit that lets people repeatedly borrow and pay back money up to a set limit and time. 

Learn about how PLOCs work, how they compare to other types of credit and loans, and what to consider before applying.

What you’ll learn:

• A PLOC is a type of revolving credit account.

• Like many credit cards, PLOCs are generally unsecured and have variable interest rates.

• The borrower has a set period of time, called a draw period, to access their PLOC. 

• 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 means it can be used and paid down repeatedly up to the line’s credit limit for as long as the line of credit remains open and in good standing. Some banks and credit unions offer PLOCs. They might require borrowers to have a checking account with them.

PLOCs are typically unsecured and have variable interest rates.

The amount you can borrow with a PLOC is decided by the lender and typically based on factors like income and credit scores.

Here are a few examples of how a borrower might decide to use a PLOC:

• Home renovations

• Emergency expenses, such as medical bills

• Managing cash flow if income is irregular

• Consolidating debt

If you apply for a PLOC and are approved, the lender will typically set a draw period and a repayment period. During the draw period, usually from two to five years, you can borrow and repay any amount up to the credit limit.

There’s a minimum monthly payment based on the amount borrowed, not on the credit limit. According to the Consumer Financial Protection Bureau (CFPB), you’ll pay less in interest if you consistently make more than the required minimum payment.

Once the draw period expires, there’s typically a repayment period. That’s a set period of time over which you can pay the outstanding balance plus interest. 

Some PLOCs require the balance to be paid in full shortly after the draw period ends. This repayment structure is called a balloon payment.

Depending on the specific terms and conditions of the loan, the PLOC may come with fees like: 

• Application fees

• Origination fees

• Annual or monthly maintenance fees

• Transaction fees

• Late payment fees

PLOCs are just one way to borrow money. Here’s how some other types of credit and loans compare:

PLOCs and personal loans are similar because they both involve borrowing money from a lender without collateral. But a PLOC is a revolving line of credit—typically up to a certain limit—that often has a variable interest rate. And a personal loan is a fixed amount of funds usually distributed as a lump sum. Personal loan payments generally stay the same during the loan repayment term.

A home equity line of credit (HELOC) is secured against the equity in your home. Borrowing funds using a HELOC could be riskier because of the possibility of foreclosure from missing payments. But because a HELOC is backed by your home, interest rates tend to be lower than with loans that are usually unsecured, like PLOCs.

A business line of credit works like a PLOC but is geared toward business rather than personal use. A business may use the 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.

PLOCs and credit cards are both types of revolving credit. But there are a few key differences, including:

• Accessing funds: With PLOCs, you can typically only access funds using checks or bank transfers. Credit cards let you use your account by swiping, tapping or dipping your card and by shopping online. 

• Credit type: Credit cards are a type of open-ended credit while PLOCs are typically closed-ended. Once a PLOC’s draw period ends, you have to pay back the line of credit in full. 

• Interest rates: PLOCs sometimes offer lower interest rates, but you may have to pay a fee each time you withdraw funds. Credit cards may have higher rates, but the CFPB says cardholders can reduce or avoid interest by paying off their balance on time and in full each month. 

• Rewards: Many credit cards let you earn rewards in the form of cash back, points or miles—something you typically won’t get with a PLOC.

You may be able to apply for a PLOC at your current bank or financial institution. You can also compare interest rates and terms by checking out online lenders and credit unions. You may need to be an existing customer before you apply. The CFPB recommends reviewing the annual percentage rates (APRs) and the associated fees before moving forward.

Applying for a PLOC is similar to applying for a credit card or a personal loan. You’ll provide some personal information, like your annual income and Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN). The lender will evaluate your creditworthiness before making a decision. Most lenders require a good credit score and a strong credit history.

Here are answers to some frequently asked questions about PLOCs:

Whether a PLOC is right for you depends on your circumstances.

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