A revolving line of credit is a loan product that lets you borrow up to the credit limit on an as-needed basis. Similar to a credit card, you can repay the amount you borrow, and once it’s reflected in your account, borrow the funds again up to the credit limit.
How Does a Revolving Line of Credit Work?
If you’re approved for a revolving line of credit, you can withdraw from it at any time up to the limit established by the lender. You’ll only pay interest on the amount you borrow, and you won’t have to reapply each time you want to make a withdrawal to access cash.
Is a Revolving Line of Credit the Same as a Loan?
Not quite. When you take out a loan, the funds are dispersed in a lump sum. You’ll pay the loan over a set period in monthly installments that include both principal and interest.
An Example of a Revolving Line of Credit
Here are some examples of revolving lines of credit:
- Credit card: These debt products allow you to make purchases up to your credit limit. The outstanding balance must be paid back monthly when the billing cycle ends to avoid interest charges
- Home equity line of credit (HELOC): A HELOC lets you borrow against the equity in your home and uses your home as collateral. You can make withdrawals against this line during the draw period, which typically spans 10 years, and make interest-only payments on the amount you borrow. When it ends, you’ll be on the hook for monthly payments that include principal and interest over a 20- or 30-year repayment period. The interest rate on most home equity lines of credit is variable, so your monthly payment could change over the loan term.
- Personal line of credit: You’ll get approved for a set amount you can borrow from as often as needed. You can pay down the balance and use the funds again until the draw period ends. Business lines of credit are also available for small business owners at some banks.
When a Revolving Line of Credit May Be a Good Idea
A revolving line of credit could be suitable if:
- You want a pool of cash you can access for unexpected expenses at any time.
- You want to use a HELOC to convert the equity in your home to cash.
- You’re self-employed and want to smooth out income gaps.
- You want to earn travel perks and cashback with a rewards credit card.
Alternatives to Revolving Lines of Credit
If you don’t want to take out a loan, review the alternatives you have instead of a revolving line of credit:
Consider a Home Equity Agreement If You Own a Home
You can convert a portion of your equity into cash without taking on additional debt through a home equity agreement. Consider a reputable company if you’re interested in exploring this option, as you can get cash today in exchange for a percentage of your home’s future value.
Consider a Personal Loan If You Don’t Own a Home
A personal loan is an installment loan product that could work if you already have a plan for how you’ll use the funds or need to make a big-ticket purchase. You’ll get a predictable monthly payment and competitive interest rate (assuming you have good or excellent credit). You can also pay more than the minimum payment each month to pay the loan off early and save on interest if the lender doesn’t charge prepayment penalties.
