Some expenses are easy to plan for. Others aren’t. It’s easier to manage your personal finances when expenses are predictable, but a personal line of credit may be able to help when they’re not.
A line of credit gives a borrower access to a set amount of funds that they can draw from, called a credit limit. You can borrow the full amount, or take a portion to cover an expense. As it’s repaid, the funds become available to borrow again without the need to reapply. This makes a line of credit a flexible borrowing option that can help you manage cash flow or cover a gap when an emergency pops up.
However, before you borrow it’s important to understand when a line of credit makes sense, or when another option may be a better fit.
When a Line of Credit Makes Sense
A line of credit may make sense if you have variable income, are dealing with unexpected expenses or you’re planning a project and don’t know what the final cost will be. Unlike a personal loan that provides a lump sum upfront, a line of credit lets you borrow only what you need from your available credit and repay it over time.
That flexibility can be helpful when you do not know the exact amount of money you’ll need. It can also help when expenses come up over a period of time instead of all at once. It can also give you access to funds more than once, as long as your account remains open and you have available credit.
A line of credit has many benefits, but before borrowing make sure you understand the costs and repayment terms. Review the interest rates, APR, fees, draw period, repayment period and minimum monthly payments. A line of credit can be useful, but it works best when you have a clear plan for how much you’ll borrow and how you’ll pay it back.
7 Times It Might Make Sense to Use a Line of Credit
Emergency Expenses
A line of credit can act as a safety net to help you take care of emergency expenses, like car repairs or emergency home repairs. You can borrow money from your credit limit when you need and pay it back overtime. However, you may want to consider the cost of borrowing before using a line of credit to take care of emergencies — if you have an emergency fund, it may make more sense to take money from there first.
Ongoing or Staged Projects
Some expenses are hard to estimate upfront, especially projects that happen in stages. A line of credit can help you pay for costs as they come up instead of borrowing the full amount before you know the final price. The risk is that several smaller draws can add up quickly. Track each draw, review your outstanding balance often and set a limit for how much you’re comfortable borrowing before the project starts.
Cash Flow Gaps for Variable Income
A line of credit may make sense when you need flexible access to money for irregular income, unexpected expenses or projects with uncertain costs. Unlike a personal loan that provides a lump sum upfront, a line of credit lets you borrow only what you need from your available credit and repay it over time.
That flexibility can be helpful when you do not know the exact amount of money you’ll need or when expenses come up over time instead of all at once. It can also give you access to funds more than once, as long as your account remains open and you have available credit.
Before using a line of credit, make sure you understand the costs and repayment terms. Review the interest rates, APR, fees, draw period, repayment period and minimum monthly payments. A line of credit can be useful, but it can work best when you have a clear plan for how much you’ll borrow and how you’ll pay it back.
Bridging Bills Between Paychecks
Sometimes a bill may be due before you get paid. A line of credit can help you take care of essentials like rent, groceries or utilities now and be repaid later. This can be helpful when the timing of your income and expenses does not line up.
Use this option carefully. If you’re using credit to cover the same bills every pay period, it may be a sign that your budget needs a closer look. A line of credit can help with timing, but it should not become a regular replacement for income.
Consolidating Higher-Interest Debt
A line of credit may help you consolidate higher-interest debt if it offers a lower APR, fewer fees or a repayment schedule that fits your budget.
For example, if you’re carrying balances on multiple credit cards, you may be able to use a line of credit to combine those payments into one outstanding balance. This can make repayment easier to manage.
But consolidation only helps if it lowers your overall cost or gives you a clearer path to repayment. Before moving debt, compare interest rates, fees, minimum monthly payments and the total amount you’ll repay over time. You should also avoid adding new balances to the accounts you paid off.
Large or Flexible Purchases
A line of credit can be useful for large purchases or expenses. This could include moving expenses, furniture, appliances, car repairs or home improvements.
A personal loan may be a better fit when you know the exact loan amount you need and want predictable monthly payments. A line of credit may be more useful when the amount could change or when you need to pay for costs in stages.
Before borrowing, set a limit for the amount you’re comfortable using. Just because more credit is available does not mean you need to use it all.
Recurring Annual Expenses
Some expenses are predictable, but they don’t happen every month. Annual insurance premiums, car registration, school costs, and home maintenance can all put pressure on your budget.
A line of credit may help cover these costs if you need more time to pay. However, if you’re using a line of credit for a recurring expense, consider rearranging your budget to build savings to take care of these costs in the future. That can help you rely less on credit the next time the bill comes up.
When a Line of Credit is Not the Right Choice
A line of credit may not always be the right fit. In some situations, another option may be more affordable, predictable or easier to manage.
You want predictable payments. Line of credit payments are not usually predictable. They change based on the amount you borrow, your interest rate and other terms. If you want payments to be the same every time so you can easily budget for them, a personal loan may be a better fit.
You’re using it to cover everyday expenses long-term. A line of credit can help with short-term cash flow gaps, but relying on it for regular bills can make the balance harder to pay down. If your income and your expenses aren’t lining up, it may be time to review your budget.
The cost is too high. Things like interest rates, transaction fees and maintenance fees can vary a lot depending on your lender and your overall creditworthiness. If you don’t have a good credit score, the cost of borrowing will likely be high and it may be worth considering some other options.
You don’t have a repayment plan. Because you can often borrow again as you repay, it can be easy to focus on available credit instead of the outstanding balance. Before using a line of credit, know how much you can afford to repay and how long repayment may take.
The expense can wait. If the expense isn’t urgent, putting money aside in a savings account is typically a better option. This can help you avoid borrowing costs and keep your credit available for more important needs.
Line of Credit vs. Credit Card vs. Personal Loan vs. HELOC
Line of credit.
A line of credit gives you access to funds up to a set credit limit. You can borrow what you need, repay over time and borrow again as long as you have available credit and the account is in good standing.
A line of credit may work well for:
- Unexpected expenses.
- Short-term cash flow gaps.
- Projects with changing costs.
- Borrowers who want flexible access to funds.
Credit card.
A credit card is a type of revolving credit similar to a line of credit, though there are some differences. With a line of credit, you’ll typically make a draw from your available credit and the funds will be deposited into your checking account to be used like cash. A credit card also gives you access to a credit limit, but you’ll charge purchases to your account. Not all purchases or expenses can be paid with a credit card.
A credit card may work well for:
- Smaller purchases.
- Day-to-day spending.
- Rewards or cash back, if you avoid interest.
Personal loan.
A personal loan usually provides a lump sum upfront. You then repay the loan over a set repayment period with scheduled payments. A personal loan may be a better fit when you know the exact amount of money you need and want predictable monthly payments.
A personal loan may work well for:
- One-time expenses.
- Debt consolidation.
- Borrowers who want a fixed repayment schedule.
Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, is a line of credit that is secured by the equity you have in your house. Because it’s a secured line of credit, you may qualify for lower interest rates and better terms. However, if you fail to repay, your home may be at risk.
A HELOC may work well for:
- Homeowners with available equity.
- Home improvements.
- Larger expenses.
How to Decide if a Line of Credit Is Right for You
Before applying for a line of credit you should make sure it fits your needs and your budget.
Start with the expense. Decide if this is something urgent or something you could save up for instead. Consider whether you know the total cost and if you would prefer predictable payments. If so, a personal loan may be a better fit. If the cost is uncertain or spread out over time, a line of credit may offer more flexibility.
You’ll also need to review the cost of borrowing. Look at things like the fees, minimum payments and the interest rate. You should also check and see if it’s a variable interest rate or fixed interest rate. It’s important to look at how much time you have to repay as well. A longer term may mean lower payments, but it can also mean you’re paying more in interest.
You’ll also need a plan to manage repayment. Decide how much you’ll use, what you’ll use it for and how you’ll repay the balance. A line of credit works best when it gives you more control — not when it makes your budget harder to manage.
The Bottom Line
A line of credit can be useful when you need flexible access to money for unexpected expenses, irregular income or costs that come up over time. Before you decide to borrow, be sure to do your research and that a line of credit is the right fit. Compare your choices carefully and choose the one that works best for your budget.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
