What are line of credit personal loans and how do they work?
- A line of credit personal loan lets you access and withdraw funds up to an approved limit as needed, with interest charged only on the amount you actually use.
- Unlike a standard personal loan, it provides ongoing, flexible access to funds that you can redraw as you repay, rather than receiving a fixed lump sum upfront.
What are line of credit personal loans?
A personal line of credit loan allows you to access a predetermined amount of funds at your discretion. You repay these borrowed funds via monthly repayments and are typically charged a variable interest rate.
While making monthly repayments, you also have the ability to withdraw additional funds, provided you haven’t exceeded your agreed credit limit with the lender. Importantly, you’re only charged interest on the money you’ve withdrawn, not your balance. So if you had a balance of $20,000 and you withdrew $5,000, you’d only be charged interest on $5,000.
How a line of credit personal loan compares to a credit card
If you think a line of credit personal loan sounds a lot like a credit card, you’d be correct. There are a lot of similarities between the two, but there are some key differences.
Line of credit personal loans often have much higher credit limits than credit cards and also tend to have lower interest rates. Lenders only require you to submit a credit application when you first take out the loan, not each time you withdraw funds. Some lenders even have the option to link your line of credit personal loan with a debit card, making withdrawals simple.
Much like a credit card, you can use a line of credit personal loans for whatever you wish. Whether that’s a holiday, renovations, a vehicle, or some random purchase, lenders typically don’t place restrictions on what you can use the funds for. Additionally, you rarely have to inform the lender about what you plan to use the funds for.
What’s the difference between personal loans and line of credit personal loans?
It can be easy to get personal loans and line of credit personal loans mixed up, not least because of their similar names. Here are some their key differences:
| Feature | Line of Credit Personal Loan | Credit Card |
|---|---|---|
| Credit Limit | Often higher borrowing limits | Typically lower limits |
| Interest Rates | Generally lower rates | Often higher rates, especially on carried balances |
| Application Process | Apply once when opening the account | Apply once; limit increases may require approval |
| Access to Funds | Withdraw funds as needed; some lenders offer debit card access | Use card for purchases or cash advances (may include higher fees) |
| Use of Funds | Usually no restrictions | Flexible spending, but higher rates can make large purchases costly |
These differences mean personal loans and line of credit personal loans appeal to different groups of people. Borrowers who are looking for flexibility and access to short-term credit may be more inclined to take out a line of credit personal loan. Borrowers who are after more cash flow certainty and a larger loan amount might be keener on a personal loan.
Secured vs unsecured line of credit personal loans
Line of credit personal loans can be secured or unsecured, depending on your circumstances and the lender. Security refers to securing the loan against an asset you own, like using a car you borrow a loan for as security.
More often than not, security will give you a better chance of being approved, access to higher loan amounts, and potentially a lower interest rate.
An unsecured line of credit personal loan may be difficult to obtain if you have a less than impressive credit history, and if you are approved, you may be stung with a higher interest rate and fees.
Read more: Secured vs unsecured personal loans: Which is right for you?
What to consider when looking for a line of credit personal loan
If you’re shopping for a line of credit personal loan, some of the factors you should consider include:
Interest rates: As with any credit product, reviewing interest rates is one of the most important things you can do. Interest rates on line of credit personal loans have a large range and often come down to your personal circumstances and credit score. Shopping around for a rate is vital, and adding security may drop your rate.
Fees: Most line of credit loans have an annual service fee but this isn’t a uniform cost across the board. Additionally, different lenders may have other fees on top of this. Check the comparison rate to see the true cost of the loan.
Fund accessibility: Line of credit personal loans are often attractive to people because of the pool of funds available for withdrawal. But if the funds aren’t very accessible, this benefit is rendered obsolete. Check out what the process is for withdrawal before entering into any contracts, and see whether you can link a transaction account or debit card.
Loan amount: Line of credit personal loans often don’t have large loan amounts available for withdrawal. If you’re looking to borrow more than $50,000, you may be better off considering a regular personal loan.
Repayment terms: There are typically two ways you can make repayments on line of credit personal loans. Revolving credit allows you to keep the loan open for as long as you see fit, provided you’re making repayments. Term-plan line of credit loans require you to make repayments over a period of time, typically up to five years. Be sure you know which one the lender requires before borrowing any cash.
Who offers line of credit personal loans?
A number of larger lenders like the big four - ANZ, Commonwealth Bank, NAB, and Westpac - offer line of credit personal loans. You can also access them through peer-to-peer (P2P) lending via platforms like Wisr and Plenti.
Whichever you end up going with, be sure to do your research prior. The personal loan market is rife with smaller lenders who, in some cases, can be less than reputable.
Related: Providers offering peer-to-peer loans in Australia
How to apply for a line of credit personal loan
Applying for a line of credit personal loan will differ between lenders, but the process will typically resemble the following:
- Shop around lenders to find one with a competitive interest rate and that suits your personal circumstances, taking into account other factors like fees, loan amount, repayment terms, and fund accessibility.
- Submit your application to your desired lender. This will include information like personal details, proof of income and employment, and lists of your assets and expenses.
- The lender will review your application. Some lenders will have same-day approval while others could take a week. Line of credit personal loans are typically easier to approve than other credit products.
- After the lender approves you, look over the contract to ensure everything is as agreed, like the interest rate. You can then sign off on the loan and have access to the funds shortly.
In the market for a personal loan? The table below features personal loans with some of the lowest interest rates on the market.
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Secured Type | Early Exit Fee | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.24% p.a. | 6.95% p.a. | $389 | Variable | Unsecured | $0 | $10 | $495 | $23,334 | |||||||||||
5.95% p.a. | 5.95% p.a. | $386 | Fixed | Unsecured | $0 | $0 | $0 | $23,171 | |||||||||||
5.76% p.a. | 5.76% p.a. | $384 | Fixed | Unsecured | $0 | $0 | $275 | $23,066 |
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Pros and cons of line of credit personal loans
Pros
Only charged interest on the funds you borrow, not your balance.
Flexibility to withdraw funds when you want
Accessibility through ATMs, debit cards, and transaction accounts
Cons
Annual fees, regardless of whether you withdraw funds
Temptation to overspend funds
Appears on your credit report, so it may affect other loan applications
Savings.com.au’s two cents
Line of credit personal loans can provide a great safety net and easy access to funds in the event of an emergency. However, a large sum of money sitting in an account available for you to use when you wish could tempt borrowers to overspend or make purchases they don’t need. Always budget accordingly and ensure you can make repayments before spending any money.