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

A personal line of credit (PLOC) is a type of revolving credit that lets you repeatedly borrow and pay back money up to a certain limit. A PLOC can be a flexible financial option to help you manage your spending for both budgeted and unexpected expenses.

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

What you’ll learn:

• A PLOC is a revolving credit account that could be used to pay for things such as home improvement projects or emergency expenses.

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

• The borrower can only access their PLOC during a set period of time, called a draw period. 

• 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. That’s assuming the line of credit remains open and in good standing. Banks and credit unions may offer PLOCs. And as the Consumer Financial Protection Bureau (CFPB) explains, they might require borrowers to have checking accounts with their institution.

PLOCs may be unsecured and have variable interest rates. They have a specific draw period during which the borrower can use the credit line. Once the draw period expires, the borrower must pay back the line of credit in full.

After applying for and opening a PLOC, you’ll access the funds by writing special checks or requesting a transfer to your checking account. You’ll receive a monthly bill from your bank or credit union and make minimum monthly payments based on the amount borrowed.

According to the CFPB, you’ll pay less in interest if you consistently make more than the minimum payment. And if the bill is paid in full each month, you may be able to avoid interest entirely.

Keep in mind that a financial institution may charge an annual fee for a PLOC. And you might 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

Ultimately, it’s up to the borrower to decide how to use their personal credit line. Here are a few examples of what a PLOC might be used for:

• Home renovations

• Unexpected expenses

• Emergency expenses, such as medical bills

• Managing cash flow if you have irregular income

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

PLOCs and personal loans are similar because they both involve borrowing 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.

A home equity line of credit (HELOC) is a secured loan because it involves borrowing against the equity in a 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 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.

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

• How to access 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. 

• Open- versus closed-ended: Credit cards are open-ended, while PLOCs aren’t. Once a PLOC’s draw period ends, you have to pay back the line of credit in full. And if you want to keep the account open, you have to reapply. 

• 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 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.

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:

• Flexible, easy access to funds

• Relatively low interest rates

• No collateral requirement

• Possible use for overdraft protection

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

• Tough qualification for borrowers with low credit scores

• Fees, such as origination fees and maintenance fees

• Having to pay off the entire PLOC balance annually

• PLOC interest, which isn’t tax-deductible

• A set expiration date

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—but keep in mind, you’ll often 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 need to provide some personal information, like your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) and annual income. Then the lender will evaluate your creditworthiness before approving you for the PLOC. Most lenders require you to have at least a good credit score and a strong credit history.

Here are answers to some frequently asked questions about PLOCs:

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 ways to access credit, 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.