By Karen Haywood Queen
Your best client owes you $25,000 -- you know they'll pay, but in the meantime, bills are due. You work on commission and your income, while excellent annually, is a roller coaster month to month. Bottom line: Your financial boat is temporarily swamped.
A personal line of credit may be able to bail you out, but it's important to understand how it compares to other credit options.
A personal line of credit is an unsecured revolving account with a variable interest rate allowing you to borrow money as you need it, says Natalie M. Brown, vice president of consumer lending communications for Wells Fargo. A personal line of credit may be cheaper than a credit card cash advance, more flexible than a personal loan and won't require collateral as does a home equity line of credit. But it's not for everyone.
How it works
The maximum amount you can borrow varies widely based on your financial institution and credit qualifications. Citi's top credit limit is $25,000, while SunTrust allows lines of up to $250,000. At Wells Fargo, the range is $3,000 to $100,000, Brown says.
You won't necessarily have to say what you want the money for when you apply, but you could. It will depend on the lender and the amount being borrowed, says Nessa Feddis, senior vice president and deputy chief counsel for the American Bankers Association.
You can access your personal line of credit by check, phone or online, Brown says, adding that your monthly payments depend on how much you owe. For example, the minimum payment at Wells Fargo is $25 or 1 percent of the balance owed, plus the total of all finance charges and fees. The bank charges a $25 annual fee, Brown says, an amount that CreditCards.com found to be typical.
Who qualifies for a line of credit?
Because personal lines of credit are not secured with collateral, they are generally offered to customers with a strong credit history who not only have a strong credit score but also can demonstrate an ability to repay the line, Brown says.
The better your credit rating, the more likely you are to get a personal line of credit on good terms, says Mike Sullivan, director of education for Take Charge America, a nonprofit credit counseling agency based in Phoenix. Every institution
sets rules and standards and those standards change rapidly based on competition and other factors, he says. "I would guess that someone with a 650 FICO could find a willing lender, but I have no real knowledge of actual terms at multiple institutions," Sullivan says.
People who take out personal lines of credit usually are not in a situation with no other options. They often have assets such as certificates of deposit, bonds or stock accounts, or a retirement fund but don't want to cash out those assets, Sullivan says. For example, if you borrow from a retirement account and can't or don't repay it, you'll have to take a penalty and pay interest, he says. "Those options may cost you a lot more," he says.
Why you might need one
For people who work on commission or otherwise have irregular income, a personal line of credit can smooth out finances, Sullivan says. "If you have uneven cash flow, occasionally you may have a cash flow issue," he says. "A personal line of credit is something that a person can access on a regular or irregular basis to get from a bad month to a good month."
Sullivan once suggested a personal line of credit to a client who needed to close on the purchase of a vacation home a month before he could finalize the sale of another house. "He was concerned about having to withdraw $15,000 from a retirement fund to do that," Sullivan says. "I suggested a personal line of credit to him as a one-time option and it worked very well."
Another reason credit counselors might recommend a personal line of credit is to pay a tax bill, says Sheri L. Stuart, senior communications specialist for Springboard Nonprofit Consumer Credit Management, in Riverside, California.
When to back off
Student loans are a different story. Because of tight federal regulations on education loans, you'd likely have trouble being approved if you tell the lending officer you want to use a personal line of credit to pay for college, Feddis says. The Federal Reserve Board's amendments to the Higher Education Opportunity Act stipulate that creditors that extend private education loans must provide disclosures about loan terms and about federal student loan programs that may offer less costly alternatives. As a result, banks are wary about offering lines of credit for such purposes.