What Is a Personal Line of Credit and How Does It Work?

First Republic Bank
June 18, 2020

Juggling many financial responsibilities at once requires a certain level of finesse and, occasionally, a number of financial products. Sometimes, particular financial situations — like paying off student loans, upgrading a home or covering children’s K-12 education costs — may require a significant influx of cash, even for individuals with robust savings. Besides credit cards, there is a less-discussed option that is both flexible and can help provide access to cash now for future financial needs: the personal line of credit.

If you’re unfamiliar with what a personal line of credit is or how it works, consider the following basics about the product to help determine if it’s the right option for you.

How does a personal line of credit work?

A personal line of credit is a set amount of money from which you can borrow (up to the limit) for a given period of time, referred to as your draw period. Similar to a credit card, you take from the available balance only the amount you need, and you pay interest on that amount.

In this way, a personal line of credit is a type of product that’s known as a revolving line of credit. With a personal line of credit you have access to an available balance of funds available at any time, and you have the ability to draw from the funds over time as you need it.

A personal line of credit is a flexible financial product for several reasons:

  1. With a personal line of credit, you choose when to take advances, as opposed to a term loan, where you receive a lump sum at the beginning and start paying interest on it immediately.
  2. You only pay interest on the amount that you’ve drawn from a personal line of credit.
  3. Assuming you stick to the lender’s terms, once the amount drawn against the personal line of credit is paid back, that amount is available for you to borrow from again immediately during your draw period.

Personal lines of credit can be secured or unsecured. For unsecured lines of credit, you don’t need to put up any form of collateral — like a savings account, for example — to actually apply. For secured lines of credit, collateral would be required before you could gain access to the loan. An example of this is a home equity line of credit, also known as a HELOC. With a HELOC, you’re borrowing against the available equity from your home and the home is used as collateral for the line of credit.

If you’re determining whether a personal line of credit or a credit card is better for you, one main distinction between the two is access to funds; personal lines of credit are ideal for accessing cash to cover large planned expenses, such as moving to a new city or refinancing student loans. They can offer access to capital for your planned future milestones, whether it’s covering expenses for minor home upgrades or starting a family, when the time is right for you.

Credit cards, on the other hand, are best for short-term financing, with easy payment at the point of sale. They’re great for covering expenses that are within your monthly budget—say, treating a loved one to a nice dinner. Credit cards may offer cash advance options, but the access is often limited to a portion of your overall credit limit, and the fees can make it much more expensive.

How to get a personal line of credit

A personal line of credit is generally provided to an individual by a bank or credit union; terms may vary, depending on the lender, so it’s important to do your research before you commit. One way to compare offerings across financial institutions is to look at interest rates and fees.

Interest rates on personal lines of credit are usually variable, so they can fluctuate with the index (such as the prime lending rate) that they’re connected to. For this reason, you may want to find a lender that offers fixed rates on personal lines of credit. Because fixed rates remain constant, you won’t have to worry about rising interest rates impacting your debt. In addition, having a consistent monthly payment can make it easier to plan for the future as you know what to expect.

Fees, too, can be associated with the line of credit, depending on the lender. They may include:

  • An annual maintenance fee that ensures the line of credit is available during the draw period, which is charged on an annual basis or broken up into monthly increments.
  • A late payment fee, if you are delinquent on payments.
  • A transaction fee. Some banks charge a small fee each time you make a withdrawal.

When shopping around for a lender, don’t be afraid to ask about interest rates and fees as you evaluate your options. For example, First Republic’s Personal Line of Credit offers fixed interest rates and does not have prepayment, origination or maintenance fees.

Once you’ve decided on a lender and successfully applied, the financial institution will set your borrowing limit and personal line of credit interest rate based on several factors, like your credit score (something in the good or excellent range is preferable), income and existing debt.

How you actually receive your money will depend on the specific product you go with. Some financial institutions may provide you with checks or a card to use specifically for your personal line of credit, or, if you have additional products with the financial institution, your money could be deposited into another account, like a checking account, when you’re ready to use it.

How do I pay the money back?

Generally, one of the benefits to a personal line of credit is that you don’t start accruing interest on the funds until you actually start borrowing money, which, again, could be at any point during your draw period. Once you do make a withdrawal, you’ll need to start making payments back on the account.

Depending on the lender, your personal line of credit payments may be interest-only, or encompass principal and interest. You’ll be responsible for at least making minimum payments on the amount you borrow each month.

First Republic’s Personal Line of Credit consists of an initial two-year draw period during which the borrower makes interest-only payments, followed by an amortization period (or repayment period) during which the borrower makes full principal and interest payments.

Broadly speaking, if your draw period comes to a close and you still have a balance on the account, you’ll enter what’s known as a repayment period. During this time you’ll be given a specific time frame to pay off what’s left. The specifics of repayment of a personal line of credit product will vary depending on the lender.

A personal line of credit isn’t for everyone, so choose wisely; as with any credit-related product, it’s important to have a repayment plan in place. Failing to make payments or to repay your loan on time can negatively impact your credit score.

Personal lines of credit can be a flexible and smart way to borrow money when you aren’t sure exactly when you might need it. If you’re interested in learning more about a Personal Line of Credit from First Republic and how it might help you achieve your own financial goals, see your rate using this personal line of credit calculator.

This information is governed by our Terms and Conditions of Use.

Personal Line of Credit consists of a two-year, interest-only, revolving draw period followed by a fully amortizing repayment period of the remainder of the term. Draws are not permitted during the repayment period. Full terms of 7, 10 and 15 years available.

This product can only be used for personal, family or household purposes. It cannot be used for the following (among other prohibitions): to refinance or pay any First Republic loans or lines of credit, to purchase securities or investment products (including margin stock), for speculative purposes, for business or commercial uses, or for the direct payment of post-secondary educational expenses.

The terms of this product may differ from terms of your current loan(s) that are being paid off, including but not limited to student loans. By repaying such loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness, and you may not be able to reobtain such benefits if this loan is refinanced with another lender in the future.

Borrower must open a First Republic ATM Rebate Checking account (“Account”). Terms and conditions apply to the Account. 

Contact your legal, tax and financial advisors for advice on deciding whether this is the right product for you. Terms and conditions apply.

Product is not available in all markets. For a complete list of locations, visit firstrepublic.com/locations. Applicants must meet a First Republic banker to open account. This can be done at any First Republic Preferred Banking Office. This is not a commitment to lend; all lending is subject to First Republic’s underwriting standards. Applicants should discuss line of credit terms, conditions and account details with their banker.