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Wells Fargo began advising consumers this week that they will be phasing out their personal line of credit product. In letters reviewed by CNBC, the bank said it was focusing on credit cards and personal loans.
They also said that for consumers who currently have a personal line of credit open with the bank, their credit score may be affected when the product is terminated. This short notice displeased both consumers and critics of the banking industry.
But what exactly is a personal line of credit? Select walks you through what you need to know about the product, including the pros and cons, and what to know when applying so that you can choose the one that best suits your needs.
What is a personal line of credit?
A personal line of credit, sometimes abbreviated as PLOC, is a fixed amount of credit made available to you by a financial institution over a specified period. Many consumers use a personal line of credit to consolidate debt, grow their business, pay medical bills, refinance existing debt, renovate their home, and more.
A personal line of credit is like a cross between a credit card and a personal loan. However, there are a few distinguishing features:
- A personal line of credit can allow you to receive funds in allotments, whereas a personal loan is a lump sum paid all at once.
- Interest only accrues on the amount you have withdrawn.
- Once the line of credit is fully paid off, you may be able to withdraw money again. This feature is not always available and depends on the lender.
- There may be fees associated with applying for and obtaining the line of credit, including application fees or maintenance fees. This will vary from lender to lender.
Advantages and disadvantages of a personal line of credit
There are several use cases where a personal line of credit makes sense, while in other scenarios it doesn’t. As with any personal finance decision, it pays to explore all of your options.
A personal line of credit is a great way to access capital. However, each lender can restrict the use of your funds, so be sure to check the lender’s terms. Here are some of the benefits of using a personal line of credit:
- Accessibility to funds: For example, if you are approved for a credit of $ 50,000, you do not need to withdraw the entire amount. You can withdraw as much as you want, whenever you want. You will have access to the entire line of credit during a “drawdown period”.
- Strategic ease of use: Similar to a personal loan, you can use the funds to refinance debts such as student loans or a car loan. For example, if you have a car loan of $ 20,000 and a student loan balance of $ 10,000, you can apply for a credit of $ 30,000 to pay off those two loans at once. This could potentially reduce the amount you would have to pay in interest.
- Flexible loan: Similar to a credit card, the lender can replenish access to your entire line of credit based on the repayment. This is sometimes called an open-ended credit transaction.
A personal line of credit is a different type of loan product with several unique advantages, but there are also a few disadvantages to keep in mind:
- The risk of unsecured loans: A personal line of credit is considered an unsecured loan because no collateral is taken by the lender. This usually results in higher interest rates since the financial institution assumes all the risk.
- High credit score required: Since the loan is unsecured and in some cases the line of credit can reach hundreds of thousands of dollars, a credit score of over 700 is usually required.
Alternatives to a personal line of credit
For consumers looking for additional capital to meet their goals, a personal line of credit is one of the many products to choose from. However, if you are unable to qualify, don’t worry. There are other options available to consumers for loans.
- Personal loans: The biggest difference between a personal loan and a personal line of credit is that a personal loan is a closed transaction. The lender will issue the funds and wait for repayment according to a set schedule.
- Credit card: A credit card is designed more for financing short-term purchases, while a personal line of credit is intended for financial transactions and larger investments. Most credit cards have much higher interest rates than a personal line of credit, and you’ll face high fees and interest if you don’t pay your entire bill every month.
- HELOC: Short for Home Equity Line of Credit, you can apply to withdraw equity from your home for financing purposes. Since this is a secured loan, the interest rates will generally be lower than for a personal line of credit.
How to qualify for a personal line of credit
Qualifying for a personal line of credit is straightforward. Once you find a lender with a personal line of credit that meets your needs, you will be asked for information about your current financial situation. This may include:
- Bank statements
- Investment portfolio
- Employment history
- Proof of income
- Declaration of use of line of credit
Your credit score will also be checked, so be sure to monitor your credit closely to make sure there are no mistakes.
Banks that offer personal lines of credit
Although Wells Fargo has eliminated the personal line of credit product, a large number of banks still offer the same product. Each institution offers different loan amounts, terms, and fees, so be sure to compare institutions to find the one that’s right for you.
At the end of the line
A personal line of credit can be used as a strategic tool to manage debt, grow a business, or renovate a home. Although Wells Fargo has eliminated the product from its offerings, several other banks still offer it. And with the right interest rate and terms, a personal line of credit could be a useful resource for you in your financial endeavors.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.