Is a Personal Line of Credit a Good Idea?

First Republic Bank
August 12, 2020

Depending on your needs and circumstances, opening a personal line of credit can be a good idea for securing flexible access to funds for large planned expenses. This type of financial product provides you with access to a set amount of money for a fixed number of years (called the draw period).

Here’s a brief summary of how a personal line of credit works in general, although terms and conditions will vary by lender:

  • With a personal line of credit, you can withdraw as much of the available money you want, up to the limit, during the draw period.
  • Interest accrues only on the borrowed sum, not the unused portion.
  • Assuming that 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 the draw period.
  • 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.
First Republic’s Personal Line of Credit – access funds with fixed rates from 2.25% APR (with discounts).

When evaluating whether a personal line of credit is a good option for your needs, it’s important to consider how it compares to similar financial products.

For example, the interest rates for personal lines of credit are typically lower than the rates on most credit cards, making the cost to borrow comparatively reasonable.

As another example, a benefit that a personal line of credit has over a personal loan is that interest is only assessed on the amount you use. With a personal loan, which offers a lump sum of funds at origination, interest is typically calculated into the entire amount you borrow — even if you don't need to have all that money at once.

And because a personal line of credit can be accessed multiple times over a set period of time, then used as needed for a wide array of purposes, it’s inherently more flexible than a single-purpose loan.

So how can a personal line of credit help you fund your near-term goals? Everyone’s financial situation is different, so think about your future plans, the potential costs of those plans and your ability to repay a loan. To get you started, here are the top four reasons to consider having a personal line of credit at your disposal.

4 reasons why a personal line of credit may be a good idea

Personal lines of credit have many compelling features. They act as an affordable payment tool for the things you’re ready to buy. They can also function as a way to manage planned expenses without having to wait for compensation to be delivered into your bank account or needing to liquidate investments. A personal line of credit can also be a strategic refinancing option for high-interest debt you currently hold.

Keep in mind that terms and conditions of a specific personal line of credit will vary by lender, but these are generally the key benefits:

1. Lower interest rate than credit cards

In general, a personal line of credit will offer a lower interest rate compared to a credit card, with the caveat that interest rates will vary, depending on the lender. This makes financing expensive purchases affordable. For example, you may have visions of your dream home, but you may not want to draw from your reserves for the cost of an upgraded kitchen, adding a deck or purchasing all new appliances. It may not make sense to charge these larger expenses to a high Annual Percentage Rate (APR) credit cards, because the fees can ultimately lead to higher overall costs.

You won’t have that issue with a personal line of credit. You can also refinance existing debt by using the credit line to pay down higher-interest student or auto loans.

2. Flexible access to cash

There is peace of mind in knowing that you can easily handle anticipated expenses that can be tough to precisely time or that might arise outside your normal compensation schedule. With a personal line of credit, you won’t have to delay a home renovation project, a major move to begin a new job or other family planning needs. Having the funds now, rather than waiting for that annual bonus, will ensure that you can achieve your financial goals whether they’re near or far into the future. And if those situations never come up, you won’t be charged any interest on the money that’s on standby.

3. Varied spending options

You can use the funds from a personal line of credit on almost anything. Maybe your daughter just announced her engagement and you’ve promised to pick up the tab for the wedding, or you and your spouse want to take a second honeymoon to a dream destination. Perhaps you want to start a family and are considering undergoing fertility treatments. Or maybe you’re looking into the future and want to ensure that you can financially handle years of summer camp, piano lessons and private school. You’re in control. Terms vary by financial institution, but typically, as long as you don’t use the funds for commercial and business expenses or for speculative and illegal purposes, you decide on what you want to do with the money.

4. Payments only on what you borrow

With a personal line of credit, you take from the available balance only the amount you need during the draw period, and interest only accumulates on what you borrow.

A personal line of credit is often revolving, which means that as soon as the debt is repaid, you can borrow up to your credit limit again without going through another loan approval process. For a non-revolving line of credit, the account is closed when the credit line is paid off.

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.

Such flexibility is advantageous for fluctuating expenses like medical bills. Health insurance may not cover all treatments, or have a high deductible and costly co-pays. Hospital visits, x-rays, a battery of blood tests, surgeries, orthodontics, dental implants, eyeglasses, hearing aids — all can make a huge dent in your bank account. Using a personal line of credit to manage anticipated medical expenses can help put your finances in a healthy position.

Should I get a personal line of credit?

When you’re ready for access to funds to handle the diverse array of life events that can arise, taking out a personal line of credit may be a good idea. It can be empowering to know that a trusted lender can extend you the money you need to make a significant purchase or slash the cost of old debts as you grow in your career and increase your net worth.

So think: could having flexible access to funds let you reach your next milestone and achieve your financial goals? Analyze your financial situation with First Republic's Personal Line of Credit Calculator to determine whether a personal line of credit is right for you.

First Republic’s Personal Line of Credit – access funds with fixed rates from 2.25% APR (with discounts)1.

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.

Personal Line of Credit minimum is $65,000; maximum is the lesser of $350,000 or debt to be repaid at origination plus $100,000. If no debt to be repaid at origination, the maximum loan amount is $100,000. Line of credit cannot be fully drawn 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 re-obtain such benefits if this loan is refinanced with another lender in the future.

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 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.