The right personal line of credit can help you complete large projects or make large purchases without the rigidity of personal loans or the big interest rates of credit cards. But which line gets you from point A to point B the quickest? Which offers the shortest distance from borrowing to payback, and which one doesn’t keep you hanging with big fees and small draw amounts? Using our straightforward SimpleScore methodology, we’ve rounded up the best lines of credit in 2021 to help you find the best fit for both current finances and the foreseeable future.
But which line gets you from point A to point B the quickest? Which offers the shortest distance from borrowing to payback, and which one doesn’t keep you hanging with big fees and small draw amounts? Using our straightforward SimpleScore methodology, we’ve rounded up the best lines of credit in 2020 to help you find the best fit for both current finances and the foreseeable future.
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The 6 best personal lines of credit of 2021
Best personal lines of credit at a glance
|Truist||Prime + 4.75% (8%)||4 years||$500K||4.5|
|KeyBank||11.99%–17.74%, 12.24%–17.99% in OH||Continuous||$25K||4|
*Rates accurate as of December 2020.
What to avoid with a personal line of credit
Avoid borrowing more than you can repay: It’s easy to go overboard with a personal line of credit. You might find yourself opening the line of credit for a specific reason, such as debt consolidation or home improvements. But because the money is there, you find yourself using it for other expenses. Be sure that you only use the line of credit for the purpose you intended it for and that you only borrow what you can pay back in a reasonable amount of time.
Avoid missing payments: Missing a payment on any type of credit can have a huge negative impact on your credit score. Your payment history makes up 35% of your credit score, and delinquent debts remain on your report for seven years. Failing to make a payment could have long-term consequences.
Avoid a personal line of credit when there’s a better alternative: A personal line of credit can make sense in some cases, but it’s not always the right choice. If there are better alternatives available, try those first. For example, let’s say you’re considering a personal line of credit to pay a medical bill. Hospitals sometimes offer interest-free payment plans, meaning a personal line of credit would cost you extra money unnecessarily. Even a personal loan might be a better alternative, as long as the interest rate is favorable and there are few fees.
[Read More: Best Small Personal Loans]
Where to get a personal line of credit
Banks: Traditional banks are some of the biggest lenders of personal lines of credit. Though not all banks offer them, you won’t have trouble finding one that does. You may also be able to get a better deal through a bank you have a long history with. Be aware that banks tend to have more fees, and possibly higher interest rates, than other options.
Credit unions: Credit unions come with many advantages — lower rates, fees and lenient eligibility requirements. People with bad credit can typically find better approval rates for loans and lines of credit with credit unions.. If you’re a member of a credit union (or can become a member) this might be a good option to consider. Some credit unions have exclusive membership requirements, but you’ll likely be able to find one near you to join.
Online lenders: Online financial institutions are taking over a larger share of the lending market, including in the personal line of credit space. The advanced technologies these lenders use often means quicker decisions and quicker access to your money. These banks also often come with lower rates than traditional brick-and-mortar banks. The downside of this choice is that there’s no bank location to visit if you want to talk to someone in person.
What is a line of credit?
A line of credit is like a revolving door: Once you’ve repaid money withdrawn, you can use it again and again. It’s often considered to be a more flexible form of traditional loans — instead of getting the entire lump sum upfront, you can draw the amount you need, when you need it to minimize interest payments. In many cases, however, credit lines will have higher credit score requirements than their personal loan counterparts. Some personal credit lines may also require collateral, especially if they’re secured.
How lines of credit work
The concept of credit lines is simple: When you’re approved for a line of credit, you have access to any or all of the loaned balance.
But what does this mean in practice? Consider a $20,000 loan versus a $20,000 line of credit. Even if you only use $10,000 of the loan right away, you’re responsible for the interest on the entire balance of the loan. If you draw $10,000 on your line of credit, meanwhile, you’re only required to pay principal and interest on the amount you’ve withdrawn and can access this money again once you’ve paid the balance.
Many lines of credit have draw periods after which you’re no longer able to withdraw money but must instead pay down any outstanding balance.
Consumer loan vs. personal line of credit
Unlike a personal loan, which is when lenders offer a lump sum that must be paid back over a specific time period, a personal line of credit gives you access to funds as you need them — and you’ll only pay interest on the amount you’ve borrowed. A personal loan is a good choice if you know exactly how much you need upfront, while a line of credit might be better if you expect to have ongoing costs.
Types of lines of credit
There are three common credit line types:
- Personal lines of credit — Personal credit lines are offered to individuals and are often used to pay for large purchases, schooling or home renovations.
- Business lines of credit — Business credit lines are used by companies to purchase inventory, repair equipment or supplement current cash flows.
- Home equity lines of credit (HELOCs) — Home equity lines of credit are secured loans tied to the value of your home. Typically, you can only borrow up to 80 percent of the assessed value of your home minus the amount still owing.
Benefits of a line of credit
A personal line of credit offers key benefits, including:
- Reduced interest payments — Only pay interest on the amount you withdraw.
- Reusable credit — Once you’ve paid your balance, you can access the credit again.
- Repayment flexibility — Many credit lines allow you to replay balances early with no prepayment penalty.
- Interest options — Some lenders will allow you to lock in some or all of your balance at a fixed rate to reduce interest payments. It’s worth noting, however, that you won’t be able to withdraw money from this fixed-interest portion.
How to get a personal line of credit
1. Check your credit score. Many lenders want good or excellent credit ratings to approve a line of credit application. Make sure your credit score is solid before starting the application process.
2. Select your preferred lender. As our best personal lines of credit roundup shows, not all credit options are created equal. Find the provider that best fits your needs and finances.
3. Complete the application process. While every lender differs, expect the application process to include questions about your current financial health, credit rating, assets and income. Make sure you have all this data on hand before beginning.
4. Understand the terms. Once you’ve been approved, read through the terms and conditions to make sure you know exactly what you’re paying and how it impacts your overall balance.
5. Have a repayment plan. While personal lines of credit offer better flexibility than personal loans, planning remains a priority. Track where you’ve spent your money and create a repayment plan to ensure you’re not stuck paying large interest amounts when the draw period ends.
[Read more: Best Secured Credit Cards ]
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