How Does a Personal Line of Credit Work?

A personal line of credit lets you borrow money up to a set limit and only pay for what you use. Unlike a traditional loan, you don't receive a lump sum upfront. Instead, you can tap into available funds as much or as little as you'd like. It's a flexible credit option that puts you in control of your finances. 

What is a personal line of credit? 

Think of it like a credit card, but without the plastic. You're approved for a credit limit, and you can withdraw what you need, when you need it.

Once you're approved, the money is yours to use however you see fit. And you only pay for what you use — not the full limit. As long as your account is open and payments are current, those funds are there when you need them.

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Types of lines of credit 

Not all lines of credit work the same way. Here's what to know before you apply. 

Unsecured vs. secured

An unsecured line of credit doesn’t require collateral, meaning you don't have to put up a valuable asset to qualify. These typically come with higher interest rates, and you'll need to meet certain eligibility requirements.

A secured line of credit does require collateral. If you're unable to repay, the lender may claim that asset to cover what's owed.

Revolving vs. non-revolving

With a non-revolving line of credit, you access a fixed pool of funds. Once that money is gone, the credit line closes.

A revolving line of credit works differently. As you repay what you borrow, your available credit is restored — so you can use it again without reapplying.

Personal line of credit 

A personal line of credit is a type of unsecured loan that you can use for almost anything: to pay off other debts, cover emergency expenses, or bridge the gap between paydays. It’s especially useful if your income varies month to month.

Your approved credit limit typically depends on:

• The type of credit you choose
• Your credit score
• Your income 

Fee-based line of credit

Some personal lines of credit have a fee-based structure rather than traditional interest. FlexFund from Advance America is one example. 

Available online in select states, FlexFund has two simple fees: a Statement Fee, charged each billing cycle that carries a balance, and an Advance Fee, a one-time 10% fee deducted when you request funds.

Advantages of a personal line of credit 

You may qualify even if you're still building credit

If your credit score isn't where you'd like it to be, you're not out of options. A line of credit for bad credit may still be within reach.

Some lenders, including Advance America, don't require a strong credit score to qualify. Instead, we consider factors like your employment history and income when reviewing your application.

You only pay interest on the amount you borrow 

With a line of credit, you're not charged interest on your full credit limit — only on what you actually use.

Here's an example: Let’s say you’re approved for a $2,000 line of credit but you only need $500 to cover an urgent appliance repair bill. You’ll pay interest on the $500 only, not the remaining $1,500 you haven't touched. 

Now say you’ve paid back $300 of that $500, so you still owe $200. Then an unexpected expense comes up and now you need another $700. Your new borrowed total is $900, and that's the amount interest accrues on going forward.

Unless you withdraw the full $2,000, you'll never pay interest on the full amount.

You can access money when you need it

Once your line of credit is open, it stays open. You can borrow up to your credit limit whenever you need to — and as you repay, that credit becomes available to use again.

That kind of flexibility means you're not starting from scratch every time an expense comes up. The funds are there when you need them.

You can enjoy financial flexibility 

Having an open line of credit doesn't mean you have to use it right away. You can open one now and keep it available until the moment you actually need it.

That kind of flexibility can come in handy for unexpected expenses like a medical bill, a surprise car repair, or storm damage to your home. Think of it as a financial safety net you can tap into when life doesn't go as planned. 

➢RELATED: How to Use a Line of Credit to Pay Off Debt

What to consider before applying for a personal line of credit

Your credit score 

Some lenders offer lines of credit to customers with bad credit, but not all do. Knowing where your credit score stands before you apply can help you identify which lenders may be a good fit.

Interest rates 

Personal lines of credit can come with either a fixed or variable interest rate. With a fixed rate, your interest percentage stays the same for the life of the credit line. With a variable rate, your rate can shift with the market, which means your monthly payment could go up or down over time.

If you're considering a variable-rate line of credit, it's worth factoring in the possibility of rate increases when thinking through your budget. 

Repayment terms 

Familiarize yourself with the repayment terms when opening a line of credit. Pay attention to your payment schedule, the length of time you have to pay back what you borrow, and any fees associated with missed payments. Understanding the full picture upfront can help you borrow with confidence.

Can you get a personal line of credit for bad credit? 

It depends. Borrowers with less-than-perfect credit can qualify for a line of credit if they meet other requirements. That said, factors like your credit history, income, and the lender you choose will influence how much you're approved to borrow.

If your credit score isn't where you'd like it to be, you may not qualify through a traditional bank or credit union. Lenders like Advance America may be able to help. 

Open a line of credit

Personal line of credit vs. credit card 

A personal line of credit and a credit card work similarly — both let you borrow up to a set limit and repay over time. But there are a few key differences.

A personal line of credit typically:

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

Credit cards, on the other hand: 

• Charge extra fees for cash advances.
• Start accruing interest at the end of the billing cycle. 

Personal line of credit vs. personal loan 

A personal line of credit and a personal loan might look similar on the surface, but they work differently.

• Access to funds: A line of credit gives you ongoing access to funds. A personal loan delivers a one-time lump sum.
• How interest works: With a personal loan, interest applies to the full loan amount. With a line of credit, interest only applies to what you've borrowed, not your full credit limit.
• Repayment: A personal loan requires you to repay the full amount borrowed. A line of credit requires you to repay your outstanding balance. 

Alternatives to a line of credit 

A line of credit isn't the right fit for everyone. Here are a few other options worth exploring:

• Installment loans pay out a lump sum upfront. You use the money for whatever you need and repay it over time in fixed amounts.
• Payday loans are typically repaid on your next payday. They're a straightforward option when you need a smaller amount quickly.
• Title loans use your vehicle's title as collateral. Repayment terms and conditions vary by lender, so it's worth reviewing the details carefully before applying.
• Pawn shop loans offer cash in exchange for a valuable item you own. If the loan isn't repaid by the agreed-upon date, the shop keeps the item. This option works best when you're confident you can repay on time.

How to get a personal line of credit 

Depending on your lender, opening a line of credit is a straightforward process. 

1. Compare lenders and options. Review interest rates, fees, terms, and conditions across different lenders before deciding.
2. Gather your documents. Most lenders will ask for a government-issued ID (like a passport or driver's license), recent paystubs, tax documents, and proof of income.
3. Submit your application. Apply through your bank, credit union, or a lender like Advance America.
4. Wait for a decision. Most approvals only take a few minutes.
5. Access your funds. Once approved, you can typically access your first withdrawal by the next business day. 

Get a line of credit from Advance America today 

Advance America offers two line of credit options in select states: a personal line of credit, available online and in store, and FlexFund, a fee-based line of credit available online. Whether you need a little breathing room or a flexible financial cushion you can tap into over time, we have options for borrowers across a range of credit scores. See if you qualify today.

Apply now