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.
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 discounts 1 , 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.