Key takeaways
- A line of credit is a revolving credit limit: borrow what you need, repay, and borrow again during the draw period.
- You pay interest only on the amount you’ve drawn. Drawing $10,000 of a $20,000 line at 9% costs about $75 a month in interest.
- Most lines have variable rates tied to the prime rate, now 7.00%; HELOCs are usually priced at prime plus a margin that depends on your credit and equity.
- A HELOC is usually the cheapest line but uses your home as collateral, and payments can jump when the draw period ends.
A line of credit is a flexible loan that lets you borrow up to a set limit, pay interest only on what you use and reuse the credit as you repay it. Personal lines are usually unsecured, home equity lines (HELOCs) are secured by your house and business lines fund working capital; all three typically carry variable rates linked to the prime rate.
A line of credit sits between a credit card and a loan. Like a loan, it’s often cheaper than a card. Like a card, you can draw money when you need it instead of taking one lump sum. That makes it useful for expenses that arrive over time or are hard to predict, such as a renovation paid in stages or uneven business cash flow.
How a line of credit works
- Approval: the lender sets a credit limit based on your credit, income and, for secured lines, collateral.
- Draw period: you borrow as needed by transfer, check or card. Some lines, especially HELOCs, allow interest-only payments during this time, often for up to 10 years.
- Repayment: you repay principal plus interest. On many lines, the amount you repay becomes available to borrow again until the draw period ends.
For example, if you have a $20,000 line and draw $10,000 at 9% APR, your interest is about $75 a month, charged on the $10,000 you used, not the full $20,000.
Why drawing in stages saves money
Say you need $10,000 for a project over a year, at 9%. If you take a $10,000 lump sum and carry it all year, interest is about $900. If you draw $4,000 now and the other $6,000 six months later, interest over the same year is about $630, a savings of roughly $270, simply because you didn’t borrow money before you needed it.
Types of lines of credit
Rates and terms checked: Nov. 11, 2026. They change often, so confirm with the provider before you apply. How we rate banks
| Type | Secured? | Typical cost | Best for |
|---|---|---|---|
| Personal line of credit | Usually unsecured | Higher than a HELOC, often lower than cards | Irregular expenses, overdraft backup |
| Home equity line of credit (HELOC) | Yes, by your home | Prime (7.00%) plus a margin set by the lender | Renovations, large planned costs |
| Business line of credit | Secured or unsecured | Varies widely by lender and revenue | Cash-flow gaps, inventory |
| Securities-backed line | Yes, by investments | Often low, but margin-call risk | Short-term liquidity for investors |
Line of credit vs. personal loan vs. credit card
| Line of credit | Personal loan | Credit card | |
|---|---|---|---|
| Funds | Draw as needed | Lump sum | Draw as needed |
| Rate | Usually variable | Usually fixed (~11.90% average, 24-month loans at banks) | Variable (~21.19% average on accounts paying interest) |
| Payment | Varies with balance | Fixed | Varies with balance |
| Interest charged on | Amount drawn | Full loan | Balance carried past the due date |
For a one-time cost with a known amount, a fixed-rate personal loan is often simpler. See personal loan vs. credit card and our guide to the best personal loans.
HELOC example: the payment jump
Take a $50,000 HELOC balance at 7.50% (the 7.00% prime rate plus a 0.50-point margin, an example rather than any lender’s offer), with a 10-year interest-only draw period followed by 20 years of repayment.
| Scenario | Interest-only payment | Repayment-period payment |
|---|---|---|
| Rate stays at 7.50% | About $313/month | About $403/month |
| Rate rises 2 points to 9.50% | About $396/month | About $466/month |
HELOC warning: when a HELOC moves from interest-only to repayment, the payment can rise by about 30% even if rates don’t change, and more if they do. Ask the lender to show you the payment for both periods before you sign. Our home equity loan vs. HELOC comparison walks through the trade-offs.
When a line of credit makes sense
| Good fit | Poor fit |
|---|---|
| A remodel paid to contractors in stages | A single purchase with a known price |
| Uneven freelance or seasonal income | Covering regular monthly bills you can’t afford |
| Tuition or medical bills spread over months | Investing or speculative purchases |
| A business waiting on customer payments | Long-term debt you can’t repay before rates change |
The common thread: a line works best when you know you’ll need money, aren’t sure exactly when or how much, and have a clear plan to repay each draw. If you’re borrowing to cover ongoing shortfalls, fix the budget first, because a revolving line can quietly turn into permanent debt.
Pros and cons
Pros
- Flexible: borrow only what you need.
- Interest only on the amount drawn.
- Usually cheaper than credit cards.
- Reusable during the draw period.
Cons
- Variable rates can rise. The Fed’s target range is 3.75%–4.00%, and its next moves will flow through to prime-based lines.
- Easy access can make it easy to overspend.
- Some lines charge annual, draw or inactivity fees, and some HELOCs charge closing costs or early-closure fees.
- With a HELOC, falling behind can put your home at risk.
How to qualify
- Credit score: unsecured personal lines often require good credit. See our credit score guide.
- Income and debt-to-income ratio: lenders want to see you can afford payments. Check yours with the debt-to-income ratio calculator.
- Equity: for a HELOC, lenders typically let you borrow up to about 80%–85% of your home’s value minus what you owe. On a $400,000 home with a $250,000 mortgage, that’s about $70,000 at 80% or $90,000 at 85%. Estimate yours with the home equity calculator.
- Business revenue and time in business for business lines. See unsecured business loans and SBA loans, which include SBA Express and CAPLines revolving options.
How to get a line of credit, step by step
- Decide the purpose and amount. A line works best for costs that arrive over time.
- Check your credit and, for a HELOC, your equity.
- Compare at least three lenders, including your bank and a credit union. Credit unions often have lower rates and fees for members.
- Compare the full terms: margin over prime, any intro rate and when it ends, rate caps, fees, draw period length and repayment terms.
- Ask for the worst-case payment at the end of the draw period and at the rate cap.
- Draw only what you need and set a payoff plan for each draw.
Free tools
Frequently asked questions
Does a line of credit hurt my credit score?
Applying causes a hard inquiry. A revolving personal line can count toward credit utilization, so keep your balance low compared with the limit.
Is a line of credit a good emergency fund?
It can be a backup, but cash in a high-yield savings account is safer because it costs nothing to use and can’t be frozen or reduced by the lender.
Can a lender lower my credit limit?
Yes. Lenders can reduce or freeze lines, especially in downturns, if home values fall or if your credit changes.
Is HELOC interest tax-deductible?
Possibly, if you use the money to buy, build or substantially improve the home that secures it and you itemize. Interest on money used for other purposes, such as paying off cards, isn’t deductible. Check IRS rules or a tax professional.
What happens when the draw period ends?
You can no longer borrow, and you start repaying principal plus interest, usually over 10 to 20 years. Some lenders require a balloon payment or let you renew or refinance, so read your agreement.
Updated November 11, 2026: sources refreshed with provider and official data.
Sources: Federal Reserve H.15 bank prime loan rate after the Fed’s Oct. 28, 2026 meeting; Federal Reserve G.19 Consumer Credit (credit card and 24-month personal loan rates). HELOC payments use an example rate of prime plus 0.50 point; check each lender’s own rate page for real offers. Calculations by FinInfoBlog. This article is for educational purposes and isn’t financial or tax advice.
Written by Chanchala
Founder & Lead Writer · B.Sc. Mathematics (Honors) · 9 years in banking & lending
Chanchala is the founder and lead writer of FinInfoBlog. She holds a B.Sc. in Mathematics (Honors) and has 9 years of experience in banking and lending. She writes plain-English guides on savings, CDs, loans, credit and personal finance for U.S. readers, and makes sure every example shows the math behind the money decision. How we research and fact-check.