How Does a Line of Credit Work?

If you don't qualify for a traditional bank loan, opening a Line of Credit can be a great option. Lines of credit are similar to credit cards in that you’re approved for a set credit limit. Once you open the line, you can withdraw whatever amount you need up to that limit, at any time.

If you're curious about what a Line of Credit is and how it works, you've come to the right place!

What is a Line of Credit?

A Line of Credit is a flexible loan that you can draw from at any time, up to your limit. The amount of money available in your Line of Credit is determined by your lender and usually depends on the type of credit you choose, your credit scores, and your income.

As long as you have an open Line of Credit and are current on your interest payments, you can access the available funds anytime. The great thing about having a Line of Credit is that you can use this money to pay for various needs, including emergency expenses, home or auto repairs, and medical bills.

What types of Lines of Credit are available?

Now that you have a better idea of what a Line of Credit is let's look at the different options:

Home equity lines of credit

A home equity line of credit (HELOC) is a secured loan that's based on the market value of your home minus the outstanding balance of your mortgage. A HELOC allows for a very sizeable Line of Credit, but you also risk losing your home if you can't repay your lender.

Unsecured lines of credit

An unsecured personal line of credit doesn’t require you to put up a valuable item, such as your home, as collateral. Unsecured credit lines typically have higher interest rates than secured ones, and you often need good credit to receive one.

Non-revolving credit lines

With a non-revolving personal or business line of credit, you receive a lump sum in your credit account. You can then withdraw money as needed until the line of credit is empty, or you choose to open a new line.

Revolving credit lines

With a revolving Line of Credit, you don't receive a lump sum upfront. Instead, you’re approved for a predetermined credit limit. You can then withdraw any amount from your credit line up to that limit. As long as you repay what you draw, plus interest, your credit line stays open and revolving for you to use whenever you need it.

How does a Line of Credit work compared to a credit card?

Although the concept is similar to credit cards, Lines of Credit have several differences. Typically, a Line of Credit:

  • May offer lower interest rates.
  • Could give you access to larger amounts of money.
  • Starts accruing interest when you draw from it.

By contrast, credit cards:

  • Charge extra fees for taking out a credit card cash advance.
  • Start accruing interest at the end of the billing cycle.

Can anyone get a Line of Credit?

Many different types of borrowers can qualify for a Line of Credit. Even so, your credit history, income, and which lender you choose will determine your approved borrow amount.

For example, if you have poor credit, you may not qualify for a Line of Credit through a traditional bank or credit union. But lenders like Advance America may be able to help.

What are the advantages of opening a Line of Credit?

Here are some of the top reasons to open a Line of Credit:

You may be able to get one with poor credit

Qualifying for a large personal loan can be challenging if you have bad or no credit. Opening a Line of Credit can be a viable option.

You only pay interest on the amount you borrow

Another advantage of having a Line of Credit is that you don't have to pay interest on the entire line. Instead, you only pay interest on the money you withdraw from it.

In other words, let’s say you’re approved for a $2,000 Line of Credit but you only need to withdraw $500 to cover an urgent appliance repair bill. You’ll only pay interest on the $500 until you’ve either repaid that amount (plus interest), or you draw more money from your credit line, at which point you’ll accrue interest on the additional amount borrowed.

You can access money when you need it most

Once you open a Line of Credit, it stays open. You’re free to borrow from your credit line as needed up to your predetermined limit, at which point you’ll need to wait until you’ve paid down the balance before freeing up additional funds. This means you can have immediate access to money when you need it most, such as for emergency expenses or home repairs.

You can enjoy financial flexibility

Just because you have an open Line of Credit doesn't mean you have to use it. Instead, you can open it when interest rates are low and keep it open until you need to access the funds in an emergency.

What are the alternatives to a Line of Credit?

If a Line of Credit doesn't sound like the type of financial solution you need, here are some alternatives:

Installment Loans

When you need money for unexpected costs and emergencies, an Installment Loan can be a good option. In some cases, you may qualify for an Installment Loan quicker than you would for a Line of Credit, which is essential when you need funds right away.

Payday Loans

Payday Loans are another solid alternative to a personal Line of Credit, especially if you don’t need to borrow a large amount. Also known as cash advances, Payday Loans are unsecured, short-term loans that typically get repaid on your next payday.

Title loans

A title loan is similar to a home equity line of credit because you have to offer the lender something as collateral. With a title loan, the collateral is usually the title to your car, boat, RV, or another type of vehicle. If you can't repay the loan plus interest at the repayment date, the lender can keep your vehicle in exchange.

Pawn shop loans

If you’re in a bind and can’t qualify for any other type of financing, pawn shops can offer money in exchange for valuable items. There is a drawback, however. If you can’t repay the amount borrowed by a certain date, the pawn shop keeps your collateral and resells it to recoup the costs.

How do I get a Line of Credit?

Depending on your lender, getting a Line of Credit is a straightforward process. Here's what you can expect.

1. Compare different lenders and loan options. Be sure to review each lender's interest rates, fees, terms, and conditions.

2. Gather the documents you will need to apply. Getting approved for a credit line typically requires you to provide a passport or driver's license, tax documents, paystubs, and proof of income.

3. Next, fill out and submit the loan application. You can apply for an Advance America Flex Line of Credit online or at your nearest Advance America branch.

4. Submit your application and wait for your approval decision. Typically, you’ll know whether you’re approved for a Line of Credit within minutes.

5. Once approved for your personal Line of Credit, you're ready to access your funds! You will usually receive the funds from your first draw by the next business day following approval.

Get a Line of Credit from Advance America today

Advance America offers same-day financial solutions online and in-store. Our Flex Line of Credit offers competitive rates and fees, and it’s available to borrowers with all types of credit scores. Additionally, if you prefer an alternative to a Line of Credit, we have numerous personal loan options to choose from.

Apply online for a personal Line of Credit today!

The Advance America advantage

Since 1997, Advance America has helped millions of hardworking people with a variety of financial solutions including Payday Loans, Online Loans, Installment Loans, Title Loans and Personal Lines of Credit.
157+ million
loans issued
800+ stores
and online loans
25+ years
providing loans