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What Is a Personal Line of Credit (PLOC)?

Corey Colgan, Director, Personal Line of Credit Specialist Sales, First Republic Bank
July 21, 2022

A personal line of credit (sometimes referred to as a PLOC) 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 the amount you need from the available balance, and you only pay interest on that amount.

A personal line of credit is a revolving line of credit that allows you to use the total approved funds during your draw period as you borrow and repay.

How does a personal line of credit work?

With a personal line of credit, you can access your available balance of funds available at any time during the draw period, up to your preset limit. You can draw from the funds over time as you need them. Any repaid funds during your draw period replenishes your available balance, assuming you abide by the lender’s terms.

With a personal line of credit, you choose when to take advances. This is different than a term loan, where you receive a lump sum at the beginning and start paying interest on it immediately. You’ll also have the option to only pay interest on the amount that you’ve drawn.

How can I use a personal line of credit?

Managing multiple financial responsibilities at once may require a number of financial products. Whether you need to refinance eligible debt, or require a significant influx of cash, a personal line of credit can help.

There are many ways to use a personal line of credit including refinancing student loan debt and auto loans. It can also provide access to credit for other large expenses, like covering minor home improvements, unexpected medical or dental procedures or financing a new car.

Note: By refinancing student loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness. Please consider this as you make a decision to refinance student loans, and talk to a banker if you have any questions.

Currently, all payments for certain types of federal student loans are suspended through December 31, 2022, per an executive order by the President. Interest will not accrue during this time period.

First Republic’s Personal Line of Credit1 – access funds with fixed rates from 2.95% APR (with discounts)2.

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. This isn’t always the case, however, as some lenders (like First Republic Bank) offer low fixed rates.
  • 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 solid credit score 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 available options. There are several factors to consider, from the size of the expected expense to the collateral required to borrow, and these should all play into your final decision. Personal lines of credit are just one of several popular borrowing options.

Product

Credit Type

Collateral

Notable features

Often used for

Personal line of credit

Revolving

May be secured or unsecured

Features vary widely based on lender; interest rates are typically variable

Longer-term financing for larger expenses and refinancing debt

HELOC

Revolving

Secured by the borrower’s home

Credit limit is based on equity in your home; interest rates may be lower due to the collateral involved and are typically variable

Larger expenses or to consolidate higher-interest debt

Credit card

Revolving

May be secured or unsecured

Interest rates tend to be higher than other types of debt and are typically variable

Short-term financing for small to medium expenses

Personal loan

Installment

May be secured or unsecured

Simple, lump-sum installment loan; interest rates are often fixed and typically lower than with revolving credit

Medium to large expenses where costs are fixed

How is interest charged on a personal 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 personal 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.

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.

Paying back First Republic’s Personal Line of Credit

The draw period is a fixed amount of time (2 years) during which a borrower may “draw” upon available funds, up to a limit. Like a credit card, repaid funds are again available for withdrawal, during the draw period only.

The repayment period is the set time where loan payments shift from a non-amortizing payment to a fully amortizing payment. Additionally, funds are no longer available to “draw” once the repayment period has commenced.

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 Credit1 – access funds with fixed rates from 2.95% APR (with discounts)2.

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.

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. Loan approval is subject to a completed application with associated documentation and confirmation that income, liquidity, credit history and other application information meet the minimum requirements for this product. Applicants should discuss line of credit terms, conditions and account details with their banker.

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