The world of finance can be a complicated place to navigate, especially when you're strapped for cash or have a big project looming over your cheque book. You might be considering a personalized Line of Credit but are not sure exactly how it works. Then you come across the term personal loan and are really confused! Don't worry - we're here to sort out the terms, dispense useful tips, and help you on your way to financial prowess.

What is a personal Line of Credit?

Let's start with the basics. A personal Line of Credit, also known as a PLOC, is an account with a maximum upper limit that you can continue to draw from over time and pay back with interest. In this way, a personal Line of Credit is similar to a credit card, except you may be able to get a lower interest rate and need a higher credit score when opening a Line of Credit.¹ But we'll get to that in a bit. The most important terms to keep in mind when considering a Line of Credit are:

• Unsecured loan - Don't worry, this doesn't mean your funds are in danger of getting hacked. A Line of Credit is called an unsecured loan because there is no collateral, such as a home or car, taken by the lender.
• Approval amount - When applying for a Line of Credit, you may be approved for a higher amount than you need to use. Like a credit limit, your approval amount is the maximum amount of funds you can withdraw.
• Draw amount - This is the amount you actually withdraw and use during the draw period. Then during the repayment period, you only pay interest on this amount. For example, if you are approved for $10,000 but only use $5,000, you would just pay interest on that $5,000.
• Draw period - You have unlimited access to your account during this time and can continue to withdraw funds up to your approval amount. You can also make payments during the draw period to save on interest later.
• Repayment period - If you have an unpaid balance at the end of the draw period, you will need to pay off the remaining balance during the repayment period. This is usually done in monthly payments, but some lenders require a balloon payment (paying off the entire balance at once) or a demand payment, which means the lender can ask for the full balance at any time.² Luckily demand Lines of Credit are not very common.

Top reasons to consider a personal Line of Credit

Now that we've established what a personal Line of Credit is, let's look at some ways it can be useful. A personal Line of Credit may be a good choice for you if:

1. You are currently making several high-interest payments on other debt

A personal Line of Credit can be a helpful tool for debt consolidation.³ This means using a loan to pay off all your current debt at once, like those pesky credit card bills. Then you only have one monthly payment to worry about and, in some cases, a lower interest rate on those payments. Personal Lines of Credit typically have lower interest rates than credit cards, but you can also use a PLOC to refinance other debt, like student loans or insurance deductibles.⁴

2. You have a large, variable expense

Sometimes you know a big life event is on the horizon, but you're not exactly sure how much it will cost. That's where the flexibility of a personal Line of Credit can be useful. Some examples of a large, variable expense are:

• Renovating your home
• Expanding your business
• Paying for a wedding
• Surgical procedures or medical expenses

Whether these expenses are planned in advance or take you by surprise, a flexible Line of Credit could help make sure you're covered from start to finish.

Check out our user stories page for more examples of how a LendDirect Line of Credit could be used.

3. You have good credit

Because a Line of Credit is an unsecured loan and often in amounts of hundreds of thousands of dollars, lenders need some assurance that you will be able to pay off your balance before they will open a Line of Credit with you. Your credit score is one of the many factors used to determine this reliability. Lenders typically require a credit score of 700 or higher to be approved for a Line of Credit.¹

It's also important to note that lenders will perform a hard credit check when you apply for a loan, which can impact your credit score.⁵ A hard credit check just means you've given someone else permission to review your credit history in detail. If your credit score leaves you feeling less than confident, you may find more accessible Line of Credit options if you apply with LendDirect.

Personal Line of Credit vs Personal loan

Now we've covered the highlights of a personal Line of Credit. But what's the difference between a personal Line of Credit and a personal loan? Glad you asked! The two are similar in that they both:

• Have similar requirements for approval
• Are mostly unsecured loans (no collateral needed)
• Require a hard credit check

The main difference is that a personal loan is one lump sum provided up front.⁶ The loan balance is then paid off in equal monthly installments over a specific amount of time. Personal loans also have a fixed interest rate, whereas some Line of Credit interest rates are variable.

Variable interest rates mean that when making payments toward your balance, Line of Credit payments could go up depending on interest rate changes, but a fixed-rate personal loan will have the same monthly payment each time. Just a few percentage points could make a big difference in the amount you pay, so this is an important factor to keep in mind when reviewing your financial situation.

At LendDirect, we believe in fixed-rate interest for a Line of Credit too, so your minimum monthly payment will never go up.

Ultimately, a personal loan is useful when you know the exact amount of funds you will need but lacks the flexibility to withdraw additional funds over time. If you have a one-time amount that you need all at once and prefer fixed payments, then a personal loan could be a good solution.

Can we help?

If you're looking to utilize a personal Line of Credit, consider applying with us! Unlike some Lines of Credit, LendDirect offers fixed-rate interest and if approved, you could receive your funds in as little as 15 minutes. We even provide an optional Loan Protection Plan that could cover your loan balance in case of a major life event or unexpected change. Whether or not you decide LendDirect is the place for you, we hope this information has helped you feel more confident in navigating your next adventure.