A personal line of credit (PLOC) is an unsecured revolving loan that you can use in the event of an emergency.
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How a personal line of credit (PLOC) works
A line of credit is similar to a credit card but without the card. It’s a revolving loan, which means you have a credit limit that you can draw from, and when you pay it back, the amount becomes available again.
It’s also an unsecured loan, meaning there isn’t anything that it holds as collateral. This results in a higher interest rate compared to other types of loans, such as an auto loan.
Additionally, the interest rate is variable, which results in fluctuations depending on the Wall Street Prime Rate.
To use a PLOC, you can transfer the funds to your checking account or get a cashier’s check. Transfers are executed immediately, so you’ll have access to the funds right away.
After you’ve used the PLOC, you’ll pay it back with interest. There’ll be a minimum monthly payment due. However, as with all debt, it’s good for your credit score to pay it back in full (Source: Experian).
When you don’t use it or carry a balance, you won’t have to pay for it. So, it’s best to use in the event of an emergency, or when you need instant cash.
What to look for
Different lenders will offer different interest rates, features, and maximum loan amounts.
However, there are several features that you should be aware of when you’re looking for a line of credit. They’re as follows:
- No annual fee.
- No application fee.
- No transfer fee.
- No maintenance fee.
- Serves as overdraft protection for your checking account.
When you compare it to a credit card, the PLOC is a better option for a cash advance. With credit cards, the cash advance APR can be double that of a PLOC, and it can take several hours to get the funds.
The PLOC will provide immediate funds, at a lower interest rate. If you’re short on funds, want to make a bigger purchase, or run into an emergency, it may be a viable option.
Also, it may be a good choice for debt consolidation. Since the rate is lower than credit cards and potentially, other loans, you can use it to pay off other debt.
How to get a line of credit
To get a line of credit, you need to apply. Like other loan applications, your credit score, history, income, and other factors will play a role in the lending decision and credit limit.
Since the line of credit often serves as overdraft protection for a checking account, you may be required to establish a relationship with a financial institution to get one.
If you have an emergency, some lenders can complete everything the same day, especially if you have great credit. This means that you can have access to the funds immediately.
Frequently asked questions
Most people that have it, don’t need it. As long as you’re not getting charged fees, it’s good to have in case of an emergency. However, it reports on your credit score, so it’s up to you.
Yes, you can buy a car with a line of credit. However, the interest rates are normally higher than auto loan rates.
If you don’t make your payments, it can get suspended, and even charged-off, which will negatively affect your credit score.
It’s a revolving loan, so it doesn’t have an expiration date, but the lender can reduce the limit or close it at any time.
You can be ready for unexpected expenses by having a personal line of credit, which also serves as optional overdraft protection.
The main benefit is that it offers immediate funds at a lower interest rate than other unsecured loans. Although it’s good not to use it unless there’s an emergency, you can use it for any purpose.
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About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.