Life can be expensive, even for the savviest of savers, and it sometimes helps to have an extra cushion for big-ticket expenses. A personal line of credit can be just that — flexible access to funds for those planned costs that might be difficult to precisely time, or that don't perfectly sync with your compensation schedule.
In general, a personal line of credit often offers you a set period of time (called your draw period) during which you can borrow up to the limit on the account. Although the specifics of this product will depend on the company offering it, the personal line of credit overall is a revolving line of credit that allows you access to your available balance of funds any time you need it within the draw period, and you only pay interest on the amount that you’ve taken out.
If a personal line of credit may be a good idea for your financial goals, it’s important to do your research and find the best product — and lender — for your unique circumstances. The best personal lines of credit will offer low interest rates, minimal loan fees and a level of flexibility and ease of access that is difficult to get in other similar consumer lending products. They're perfect for pre-planned expenses or ongoing projects where you aren't quite sure what the overall scope of the costs will be.
For example, as compared to a personal loan — where the borrower often receives a lump sum of funds with fixed monthly payments at the outset — a personal line of credit instead provides a draw period, during which time the borrower has the ability to draw on their available funds multiple times up to the full amount on their plan. Because the borrower has flexible access to funds during the draw period and only pays interest on the amount borrowed, a personal line of credit can be a better option than a personal loan for funding larger purchases or life events when you don’t need the money all at once.
Like most financial products, though, it’s important to do some research to determine which option is the best personal line of credit for you. Lenders will offer different incentives for their products, so it’s important to take some time to figure out which ones have the best terms and conditions for your needs.
The following five tips for finding the best personal line of credit can help you narrow down your options and pick the best personal line of credit for your financial goals.
Tip 1: Compare interest rates.
The interest rate on a personal line of credit can have a significant impact on how much you end up paying over the life of the loan, so it’s a good idea to start here when you are doing your research. The Annual Percent Rate (or APR) refers to how much interest you'll pay on your loan over the course of one year, as well as additional fees. This means it's one of the best measures of the true cost of the loan.
Different financial institutions will offer varying interest rates. While it’s true that a personal line of credit often comes with a variable interest rate — meaning that the interest rate you start out with on the product can fluctuate over time with an underlying index that changes periodically — it is possible to find products that offer fixed rates. If you can find a personal line of credit that offers a fixed rate, this can provide you with a clearer sense of what your monthly payments will be, since the interest rate will remain the same throughout the life of the loan.
At First Republic Bank, for example, borrowers have access to a fixed-rate personal line of credit with low Annual Percentage Rates (APR) between 2.25% and 3.50% with discounts.1 Although averages fluctuate, the current APRs for personal lines of credit, for comparison, range anywhere from 6% to 36%. While rates from other lenders may vary based on creditworthiness, First Republic Bank's Personal Line of Credit does not use risk-based pricing.
Tip 2: Get a full breakdown of the fees.
Additional fees — like maintenance fees or prepayment penalties, for example — are another area where you'll need to consider the overall costs. It’s important to get a full accounting of all the fees — either online or through a banker at each specific lender— that come with any type of financial product before opting in.
With a personal line of credit, a lender may fold these fees into your monthly payments once you’ve opened your line. With First Republic Bank, however, borrowers pay no origination, maintenance or prepayment fees for the life of the loan.
Tip 3: Look for convenience and flexibility.
Most people interested in a personal line of credit are looking for fast access to cash for a large project or expenses — like refinancing student loans, fertility treatments or a home remodel. As such, convenience and flexibility are key. The best personal line of credit will offer flexible repayment structures over an extended period of time.
While every personal line of credit comes with a draw period, First Republic Bank's 2-year draw period allows borrowers to pay interest only on what they take out for the first two years, which frees up the borrower's liquidity. Borrowers have the option to make both interest and principal payments during the draw period — which would replenish the line of credit and offer them another opportunity to borrow from it without undergoing a second loan approval process. If the borrower decides not to make principal payments during the draw period, then after the draw period ends, the borrower can repay the full loan amount over 5, 8 or 13 years, depending on the term length chosen at the origination of the loan. .
Tip 4: Seek out testimonials.
You probably ask for referrals or check out reviews online for most of the services and products you already use in your life, from doctors and contractors to appliance purchases — and a personal line of credit should be no different.
Before you decide to go with any particular lender, be sure to check out testimonials and reviews from other bank customers to find out if the bank’s values align with your own, and to get a better understanding of the level of service you can expect once you become a customer. Starting with the bank’s website or requesting referrals directly from a banker is fine, but be sure to also ask around in your own network or do a quick online search for outside sources, as well.
Another helpful source is the Net Promoter Score (or NPS). This provides an index that ranges from -100 to 100 and measures the willingness of customers to recommend a company's products or services to others. In other words, it's a good way to gauge a customer's overall satisfaction with a company's product or service and the customer's loyalty to the brand. First Republic, for example, has an overall NPS of 72, while the U.S. Banking Industry average sits at just 34.2
Tip 5: Don’t underestimate the value of solid customer service.
While fees and interest rates are important, since they pertain to the actual cost of your overall personal line of credit, it’s essential to also look into the customer service of prospective lenders. With any financial product, you’ll want to work with a group of people that you can trust, and who will be readily available to answer any questions you might have.
It’s also helpful when customer service is available in multiple forms (online, phone and email, for example), and it’s even better if you know you’ll get personalized attention from someone you can work with throughout the life of your loan. At First Republic Bank, for example, borrowers have access to tailored services with a dedicated banker who will stay with them from the start of their loan all the way out to the day it's paid in full.
The bottom line
At the end of the day, figuring out the best personal line of credit for you involves weighing a number of options and comparing opportunities for personal line of credit products and institutions. The factors above — finding a product that offers a low fixed APR, flexible term loan options and impeccable customer service — can help you determine the best personal line of credit lenders. Once you’re ready to get started, a personal line of credit calculator can help you assess which option is right for you.