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What Is a Personal Line of Credit (PLOC)?

Corey Colgan, Director, Personal Line of Credit Specialist Sales, First Republic Bank
January 29, 2021

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 draw 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.

How does a personal line of credit work?

With a personal line of credit, you have access to an available balance of funds available at any time during the draw period, and you have the ability to draw from the funds over time as you need them.

Some additional considerations include:

  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 abide by 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.

How can I use a personal line of credit?

Juggling many financial responsibilities at once requires a certain level of finesse and, occasionally, a number of financial products. Sometimes, particular financial situations may require a significant influx of cash, even for individuals with significant savings.

There are many different ways to use a personal line of credit including refinancing student loan debt as well as others. Using a personal line of credit allows a borrower to pay off student loans from multiple lenders. It is also a good option for situations where expenses may be ongoing, like covering home projects such as repairs or upgrades. Taking advantage of a personal line of credit to cover home expenses is beneficial because how much you ultimately borrow is up to you (up to the limit of the line of credit), and you only pay interest on the money that you actually use.

First Republic’s Personal Line of Credit – access funds with fixed rates from 2.25% APR (with discounts).

What are the pros and cons of a personal line of credit?

When considering whether a personal line of credit is the right product for you, it helps to consider some of the pros and cons.

Pros

  • Flexible access to funds: With a personal line of credit, the borrower has access to the overall limit of their loan throughout the draw period, which often lasts a number of years. This provides flexibility not only in the use of the funds but also when the money is actually used.
  • Pay interest only on what you use: The beauty of a personal line of credit is that the borrower only owes interest on the money that they actually use from the loan, rather than paying interest on the overall loan amount available to them.
  • Reusable cash flow: Assuming you abide by the lender’s terms, once you’ve paid back the amount borrowed from a personal line of credit, the full amount becomes available to borrow again, within the remaining timeframe of the original loan.
  • Ability to strategically combine and pay off high-interest debt: Since the money from a personal line of credit can be used for a wide variety of personal or household needs, it's a good way to pay off higher-interest debt, like a student loan or car loan.

Cons

  • Potentially high interest rates: Because personal lines of credit are typically unsecured loans, they may come with higher interest rates than other similar products that do require collateral, and the interest rates tend to be variable. At First Republic, though, borrowers have access to a personal line of credit with a fixed interest rate that starts at 2.25 – 3.50% Annual Percentage Rate (APR), with discounts1, which is much lower than the average 5-36% APR.
  • Additional fees: It’s common for lenders to charge annual or monthly maintenance fees on a personal line of credit, as well as other potential fees. First Republic Bank, however, waives all origination, maintenance and prepayment fees for the life of the loan.
  • May be difficult to obtain: Because the personal line of credit is unsecured, most lenders require a credit score of 700 or above to qualify. Generally speaking, the stronger you are financially, the more favorable terms you'll qualify for.

Secured vs. unsecured personal lines of credit: What’s the difference?

Personal lines of credit can be secured or unsecured.

Unsecured lines of credit

For unsecured lines of credit, collateral — such as a savings account — is not needed to apply for the loan.

Secured line of credit

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 (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.

Is a personal line of credit an open-end or closed-end credit transaction?

A personal line of credit is an open-end form of credit, as opposed to a closed-end one. This means that the borrower can make multiple withdrawals from their account throughout the life of the loan. When money on the loan is paid back prior to the account closing, that money is then available for withdrawal again within the same draw period. This is different from a closed-end transaction, where borrowers are given a lump sum to use for a specific product or service, which they must then start paying back immediately on set monthly terms.

Which is better: a personal line of credit or other types of credit?

When deciding which type of credit is best for your needs, it’s important to weigh all of the different options.

Personal lines of credit vs. HELOC

A HELOC and a personal line of credit both provide flexible access to cash during a set draw period. The main difference between the two, however, is that a HELOC requires collateral — your house — and the amount of the loan will be based on your equity in your home. Because a HELOC requires collateral, they may offer lower interest rates than a personal line of credit, but not always.

Both products also tend to have variable interest rates, but again, that will depend on the lender. First Republic Bank, for example, offers a HELOC with variable rates, as well as a Personal Line of Credit for low, fixed interest rates.

Personal lines of credit vs. credit cards

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 how much you need to borrow; 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 like solar panels 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 be expensive.

Personal lines of credit vs. personal loans

One of the main distinctions between a personal line of credit and a personal loan is that with a personal loan, the borrower receives the entire loan amount all at once, as a lump sum. A personal loan may be either secured or unsecured, and repayment starts immediately upon distribution of the loan,,

A personal line of credit, on the other hand, provides a set amount of money from which the borrower can draw from any time during the draw period. Interest due with this type of loan reflects only the amount that was actually borrowed, as opposed to the full amount. If the borrower is able to pay back their funds before the draw period is over, those funds would be available to use again within draw period.

How is interest charged on a line of credit?

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.

What fees are associated with a line of credit?

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.

How do I get a personal line of credit?

If you’re interested in getting a personal line of credit, you’ll want to understand how obtaining one from a lender generally works, which includes qualifying, receiving the money and paying the money back.

How do I qualify for a personal line of credit?

A personal line of credit is generally provided to an individual by a bank or credit union based on several factors, like your credit score (something in the good or excellent range is preferable), credit history, and income and existing debt. Some lenders — like First Republic Bank — offer better terms based on relationship-based pricing.

Once you’ve decided on a lender and successfully applied, the financial institution will review your financial profile. If you’re approved, the lender will set your borrowing limit and personal line of credit interest rates.

How will I receive the money?

How you actually receive your money will depend on the specific product you choose. 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. The borrower has the option to make additional prepayments on outstanding principal during the two-year draw period, if they want access to those funds again without going through another loan approval process.

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.

Is a personal line of credit right for you?

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.
First Republic’s Personal Line of Credit – access funds with fixed rates from 2.25% APR (with discounts).

1. Annual Percentage Rate. Rates effective as of 06/15/2020 and are subject to change.

Borrower must open a First Republic ATM Rebate Checking account (“Account”). Terms and conditions apply to the Account. If the Account is closed, the rate will increase by 5.00%. Rates shown include relationship-based pricing adjustments of: 1) 2.00% for maintaining automatic payments and direct deposit with the Account, 2) 0.50% for depositing and maintaining a deposit balance of at least 10% of the approved loan amount into the Account, and 3) an additional 0.25% for depositing and maintaining a deposit balance of at least 20% of the approved loan amount into the Account.

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. This product cannot be used to pay off credit card debt at origination.

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 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.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document.

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