A line of credit is a form of personal loan that acts almost like a credit card. It's a loan that allows you to conveniently withdraw money to use for emergencies, debt consolidation or purchases. You make payments back towards your balance and the accrued interest in monthly instalments and you can access more credit (to a set limit) when you need to. They can also be flexible, giving you the choice between a fixed term (usually between 1-5 years) or an ongoing line of credit.
How does a personal line of credit loan work?
A personal line of credit works much like a credit card, giving you access to a specified credit limit to spend on things you want and need. The main difference between a credit card and a personal line of credit is that the credit limit is usually higher on a personal line of credit, while the rates tend to be relatively lower than credit cards. You also won't need to submit a credit application every time you need to make a withdrawal.
Once you're approved, the funds are available for you to use when you need them. You are not charged interest against your entire balance, only on the funds you withdraw. Some personal line of credit loans are linked to debit cards, allowing additional flexibility on how you use the funds.
Personal line of credit vs personal loan: The main points of difference
Loan term. Personal loans have a fixed term of anywhere between one and seven years, and need to be paid back in full by the end of that term. Lines of credit don't come with a "term" and the funds you borrow become available again after they're repaid (plus interest).
Repayments. Both involve monthly repayments. However, personal loans have fixed monthly repayments while lines of credit depend on the previous balance, amount drawn, accruing interest and other factors.
Time of disbursement. With personal loans, your lender will disburse your funds up-front as soon as you agree on the loan contract and sign it. With a line of credit, you're able to withdraw up to your approved limit on an ongoing basis as long as you're meeting minimum monthly repayments
Fees. Personal loans usually charge monthly service and application fees while lines of credit usually charge annual service fees. However, lenders for both personal loans as well as lines of credit may charge a variety of other hidden fees. Make sure you're aware of all fees for any option you're considering.
Are personal lines of credit secured or unsecured?
A personal line of credit can be secured or unsecured. Which option you go for will depend on your preferences, financial circumstances and whether or not you have an eligible asset to offer as security.
Generally, opting for a secured line of credit will increase your chances of approval, give you access to a lower interest rate and increase your credit limit (usually up to the value of the asset security). Eligible security usually includes assets like vehicles and commercial or residential property.
Unsecured lines of credit do not require an asset as security. These loans will generally require you to have an excellent credit score, may be more expensive in the way of interest and your credit limit would likely be lower than with a secured loan.
How to compare your line of credit loan options
If you're considering a line of credit loan, it's important to compare your options and find the loan that's right for you. Here are some features to keep in mind when considering the products available:
The interest rate. Not only will you want to compare different interest rates, you will also want to learn how they are calculated. Check that interest is only being applied on the funds you have withdrawn, not on your total balance. Keep in mind that in some cases, you may have the option of securing the loan against an asset, which could result in a lower interest rate.
The fees.Compare fees carefully as they are not always set out clearly. While a personal line of credit may advertise no annual fee, there could be monthly fees or an establishment fee that will result in an increase in the overall cost of the loan. Make a running list of fees for each product you are considering and factor that into your loan amount. You can use a personal loan calculator to do this.
Repayment terms. There are two types of personal lines of credit. There are term-plan line of credit loans in which you have a certain time frame (usually one to five years) to pay off the amount you borrowed. The other type of line of credit loan will allow you to keep the loan open so long as you continue to make regular monthly repayments. This is known as revolving credit and might be appropriate for those who want a funding source available as a safety net for unexpected expenses.
How accessible your funds are. Another thing to consider with this type of loan is how you will access your funds. Again, read the terms carefully. While a bank may offer a card that you can use at ATMs, there could be charges applied for this convenience. You are going to want to weigh the methods of accessing the funds along with any fees associated with them.
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Questions to ask to find the right option for you
While it will depend on your particular situation, you can get a clearer picture of your decision by asking yourself the following questions:
What do you need the funds for?
If you're looking to use the funds for large purchases, you'd probably be better off with a personal loan. If you want an ongoing source of funding then a line of credit would be more suitable. If you need money for business purposes, compare specific business lines of credit.
How flexible are you with repayments?
Whichever option you consider, make sure you're well aware of how disciplined you'll need to be with repayments. Some people are tempted to use a line of credit simply because it's there. If this could be a problem for you, you may be better off with the structured features of a personal loan since they offer fixed-repayment schedules, giving you consistency and balance.
How much do you need?
Unsecured personal loans offer about $55,000 while secured personal loans would depend on the worth of the collateral you offer up as security, but can be as much as $80,000. On the other hand, not many lenders approve small amounts for personal loans but do so for lines of credit. Very large lines of credit are also available, but you'll need to meet strict eligibility criteria.
Line of credit vs overdraft: What's the difference?
Line of credit
Overdraft
Costs
Interest rates vary, but you will only pay interest on your balance, not your credit limit. Establishment fees may apply.
Overdrafts are unsecured, so variable rates generally apply. You will only pay interest on your outstanding balance, but you can expect monthly or annual fees on the account. An establishment fee may also apply.
Loan term
You generally have a choice between an ongoing line of credit, where you can keep the account open as long as it's in good standing, or one with a fixed term, generally between one and five years.
An overdraft account does not usually have fixed repayment terms. Your account will be ongoing as long as you keep making regular repayments.
Availability access
Eligibility criteria will vary, but lines of credit are generally available to those with good credit who can afford the repayments. Lenders generally provide a debit card that you can use to access your line of credit.
You will need to be an existing account holder or looking to open a transaction account with the bank to open an overdraft. You can then access your overdraft automatically when your transaction account funds have been exhausted.
How to compare lenders
When it comes to finding the right personal line of credit, as well as comparing your loan options, you also have to consider what kind of lender you want to opt for. Different types of lenders offering personal lines of credit include:
Traditional banks
Bricks-and-mortar banks such as the Big Four and others are an option for borrowers looking for a personal line of credit. Some individuals may prefer this as an option because they have a good longstanding relationship with their existing bank or they prefer face-to-face contact via a branch (something smaller lenders may not to facilitate). However, larger banks do tend to have higher rates and fees than smaller, non-bank lenders. They also usually require borrowers to have excellent credit ratings.
Credit unions and building societies
These are financial institutions, also known as "mutuals", that are member-owned and not run for profit. This means that any profits that are earned are put directly back into products and services. Standard financial products are usually on offer from these institutions, including personal loans. Like banks, credit unions and building societies tend to have branches. However, you are usually required to be a member in order to apply for finance (though this doesn't mean that if you aren't a member already, that you can't join).
Neobanks
Neobanks, also sometimes referred to as "online banks", source their own funding and make a margin on the difference. Often, neobanks will offer personalised interest rates to customers based on their financial circumstances and credit scores. Neobanks offer more competitive rates than their bigger opponents. Borrowers with less-than-perfect credit scores may also find it easier to be approved with a neobank (though they are unlikely to be offered the lowest rate). Neobanks don't usually have branches and are only accessible to contact via phone, email and live chat.
P2P lenders
Some P2P lenders may offer personal lines of credit to successful applicants. P2P lenders are finance providers that facilitate a platform where investors finance a portfolio of personal loans and earn interest on what they lend, while borrowers are given an individual rate based on their credit score. Generally, P2P lenders don't have branches and can only be found online.
What can I use a personal line of credit for?
Personal lines of credit tend to be more flexible than personal loans, which means that you can usually use them for any purpose. Whether it's withdrawing cash from an ATM for groceries or paying for a luxury holiday, a personal line of credit can often cover it.
A major benefit to personal lines of credit is that they are flexible and available for multiple purposes, such as paying for your wedding, your honeymoon or some home improvements. Personal loans, on the other hand, are a lump sum payment and some lenders may limit you as to what you can use the funds for.
Things to consider
When looking for the right personal line of credit, you ought to consider the following:
Benefits
You're (usually) only charged for what you use. In most cases you will only be charged interest on the funds you have borrowed, not the total loan amount.
You can have easy access to your funds. If your account is linked to a card, you are able to draw the funds you need through ATMs and online banking.
There are flexible terms. You can use the funds how and when you want.
Drawbacks
Fees and charges. Be mindful that fees and charges will likely apply, such as an annual fee, establishment fee or a monthly service fee. These will usually be charged regardless of whether you draw down funds or not.
How you can apply
You can use the table found on this page to begin comparing your personal line of credit loan options. The eligibility criteria will differ between lenders, so make sure to check this carefully before submitting your application. However, you will generally be asked to provide the following information:
Income. You will have to show proof of an ongoing steady income. Your payslips are usually acceptable or a bank statement that shows consistent deposits from an employer.
Liabilities. You will need to provide a complete list of your current debts.
Identification. All lenders will need to see a current and valid photo ID of the applicant. In most cases you will need to provide a photocopy for their records.
Assets. Information regarding your home if you are a homeowner, plus any vehicles you own and any savings and investment accounts in your name.
Why compare personal loans with Finder?
Addicted to details. We know taking out a personal loan is something you'll be hooked up with for a while. That's why we put hours into research for this guide (and still do at least once a month)
Rates obsessed. Lenders come in all shapes and sizes, that's why we don't just track the big banks, but all the digi folk too. Pretty much everyone but your parents to be honest.
Cash for whatever you need. Lending rates verified from 180+ products day and night. Whether you're buying a car, rennovating your home or heck just ready to let loose with the spending - we got you.
Matt Corke is Finder’s head of publishing ventures. Prior to this he was head of publishing for Australia, New Zealand and emerging markets. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates. See full bio
Bria Horne is a writer for Finder, with a specialist knowledge of personal loans, car loans and business loans. Originally from the UK, Bria has been a professional personal finance writer in Australia for over 2 years. She has an M.A and B.A in Philosophy and Literature from the University of Sussex, and previously worked on the UK’s leading hospitality publication. See full bio
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Does the Commonwealth bank provide a personal line of credit account?
Finder
ElizabethSeptember 16, 2016Finder
Hi M.Smith,
CommBank provides a Viridian line of credit that is linked to your home loan account. You can also consider a personal overdraft that is linked to your CommBank account.
I hope this helps,
Elizabeth
TinaAugust 4, 2016
Eligibility please
Finder
MayAugust 4, 2016Finder
Hi Tina,
Thanks for your question.
The eligibility criteria vary from bank to bank. But generally, these banks would approve your application based on their assessment of your income, debts, assets, credit history and provided necessary documents/information.
Cheers,
May
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Addicted to details. We know taking out a personal loan is something you'll be hooked up with for a while. That's why we put hours into research for this guide (and still do at least once a month)
Rates obsessed. Lenders come in all shapes and sizes, that's why we don't just track the big banks, but all the digi folk too. Pretty much everyone but your parents to be honest. 
Cash for whatever you need. Lending rates verified from 180+ products day and night. Whether you're buying a car, rennovating your home or heck just ready to let loose with the spending - we got you.
Hi
Does the Commonwealth bank provide a personal line of credit account?
Hi M.Smith,
CommBank provides a Viridian line of credit that is linked to your home loan account. You can also consider a personal overdraft that is linked to your CommBank account.
I hope this helps,
Elizabeth
Eligibility please
Hi Tina,
Thanks for your question.
The eligibility criteria vary from bank to bank. But generally, these banks would approve your application based on their assessment of your income, debts, assets, credit history and provided necessary documents/information.
Cheers,
May