What is a Personal Line of Credit?
A line of credit is an arrangement between a bank and borrower that establishes a predetermined borrowing limit that may be drawn, repaid, and drawn again within the limits set by the loan agreement. The borrower has flexibility to borrow only what they need for only the time needed and pay interest on only the drawn amount. This revolving credit agreement is different from an installment loan, which advances the entirety of proceeds up front and you repay in set installments over a fixed term.
For many of our customers, a personal line of credit serves as a safety net. A part of their larger financial plan, a line of credit can be available when needed as opposed to waiting to act when unexpected or special expenses arise that the day-to-day budget isn’t prepared to cover.
Personal lines of credit fund a broad variety of needs; home remodeling projects, a once-a-decade family trip, medical bills, college tuition, weddings, or to supplement uneven cash flow situations.
These and other situations are prime reasons for personal lines of credit. You borrow against your limit in sums as small or large as you need. Interest is paid (usually at a significantly lower rate than any standard-issue credit card) only on the outstanding balance, not the overall loan limit.
While there are numerous benefits to personal lines of credit, you should approach this like any financial decision and weigh the pros and cons as it relates to your financial situation. It’s wise to stick to a financial plan for appropriate use and repayment of your line of credit.
Line of Credit Types
Lines of credit come in two types: unsecured and secured. The first relies entirely on your perceived ability to make repayment that lenders get by reviewing your credit history and provable income. The other, a home equity line of credit or HELOC, uses equity in your home to act as collateral for the transaction, but our discussion here is limited to personal unsecured lines.
Personal Line of Credit
Similar to a personal loan or a credit card, an unsecured personal line of credit gets approved based on the applicant’s ability to repay the debt. Your credit history and income are key factors.
The amount available to a borrower varies from applicant to applicant — and, of course, the applicant’s perceived need.
Uses for a personal line of credit:
- Emergency expenses: The roof springs a big leak; your car’s transmission blows up; medical bills.
- Long-term projects: renovating a kitchen, adding a mother-in-law suite, paying for college or a wedding, restoring that 1957 Corvette.
- Cash-flow management: bridging the gaps for earners of irregular income.
- Debt consolidation: grouping credit card and other consumer debt into a single loan.
- Rare life experiences: the cruise of a decade; playing the great golf courses of Scotland; taking a French cooking school vacation.
If you conclude that a line of credit best meets your needs, here are a few items to consider when preparing to apply:
- How do I apply for a credit line? Personal lines of credit are unsecured, which means you don’t need to offer collateral to secure the loan. That makes it different from home equity lines of credit (HELOCs), which are secured by the equity in your home.
- How large a credit line should you request? This really depends on your needs. We recommend assessing your financial needs, what you may be using the line of credit for, while keeping in mind your income stream and ability to repay the borrowed money. Lenders evaluate creditworthiness using several metrics including loan repayment history and your ability to repay the total amount extended.
How to get started.
We encourage you to speak with First American State Bank lending officers. They are well versed in our lending products and can walk you through the particulars of each type of loan we offer at First American State Bank.
As an independent Colorado-based bank, we have some flexibilities that large corporate banks do not offer. You may have seen in the news in recent months that some large national banks have completely discontinued offering unsecured lines of credit to personal banking customers. First American State Bank has not followed suit, we will continue to offer a variety of personal banking and lending products to existing and new customers. We value personal banking relationships with our customers and strive to accommodate all your banking needs.