A personal line of credit is a type of credit account that allows you to access a predetermined amount of money for a fixed window of time. While the account is open, you can borrow this money to finance purchases as needed.
Personal line of credit is often used for unexpected expenses to cover short-term cash flow needs, but they can also be useful in a wide variety of other circumstances. This article will help you understand what a personal line of credit is.
How does a personal line of credit work?
When you open a personal line of credit, your issuer gives you the total amount of credit you can use, known as your credit limit. This means that you are free to use any amount of credit up to this limit during your line of credit’s draw period, which is the fixed window of time when your line of credit is available.
Unlike loans, where you must pay back the entire amount you’ve borrowed, personal lines of credit are a form of revolving debt. This means that even though you’re given a certain amount of credit to use, you only pay back the amount you end up borrowing to make purchases.
By and large, personal lines of credit are unsecured and require no collateral. Though this means you won’t put any of your assets at risk, it also means that you’ll generally need a better credit score to access a personal line of credit.
How do payments work for a personal line of credit?
Personal line of credit payments works similarly to credit card payments. For the amount that you borrow, you will have a due date by which you need to pay back that borrowed amount. If you don’t pay back the full amount borrowed by the due date, you will be charged interest on that outstanding balance.
As with credit cards, you also have minimum payments that you can make on your line of credit’s outstanding balance. However, it’s recommended that you try to make more than the minimum payment whenever possible to avoid any unnecessary interest charges.
With some personal lines of credit, you may be required to pay back the amount borrowed in full once a year. It’s also important to note that if you don’t make your payments on time, you may be charged late fees, and your credit score could be negatively impacted.
Make sure to check the terms of your lender’s agreement to understand the pay structure and what your requirements will be.
