What to look for in a personal line of credit lender

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Do you need extra cash to cover unexpected expenses or fund a big purchase? With inflation rising faster than wages and personal loan debt increasing by 26% year-over-year, more people than ever are using personal credit to bridge that financial gap. 

For many, a personal line of credit, sometimes called a PLOC, can be a great financial tool to fund their needs. Choosing the right lender could help save money, and headaches, on the road to a brighter financial future. But how do you know what to look for in a line of credit lender?

Let’s walk you through how to qualify for a line of credit and the key factors to consider when selecting a lender. Whether starting a business or making home improvements, we'll help you make an informed decision that can fit your unique financial needs. 

How Does a Personal Line of Credit Work?

A personal line of credit is a revolving credit that allows you to borrow up to a pre-approved credit limit. Usually, you can withdraw funds as needed and only pay interest on the borrowed amount. As you repay the borrowed amount, your available credit can be replenished (assuming you continue to meet the lender’s qualification requirements and repayment terms), allowing you to borrow again if needed.

One way to think of a personal line of credit is like a credit card with a set credit limit. However, there are some key differences between lines of credit and personal loans:

• Personal loans provide a lump sum of money upfront, while credit lines typically let you borrow as needed

• Lines of credit often have variable interest rates, while personal loans typically have fixed rates

• With a personal line of credit, you typically only pay interest on the amount you borrow, whereas personal loans usually charge interest on the full loan amount

Note: At Varo Bank, we prioritize ease and flexibility for our customers. That’s why the Varo Line of Credit¹ is an instant, one-time deposit into your account that comes with no interest, no hidden fees, and straightforward repayment terms. It is not the same as typical revolving lines of credit, but can still be borrowed against repeatedly if you continue to meet eligibility requirements.

Now, let's take a look at some of the pros and cons of a line of credit. 

Advantages of a Personal Line of Credit

• Flexibility: Once qualified. lines of credit can allow you to borrow money as needed, giving you more control over your borrowing habits.

• Lower interest rates: Credit lines often have lower interest rates compared to credit cards.

• Only pay for what you use: With a personal line of credit, you usually only pay interest on the amount you borrow.

Disadvantages of a Personal Line of Credit

• Variable interest rates: Sometimes, line of credit interest rates can fluctuate, which could make it more difficult to budget for payments over the life of the loan.

• Temptation to overspend: Without financial discipline, the easy access to funds could lead to overspending when not used responsibly.

• Potential fees: Some personal lines of credit come with annual fees, transaction fees, or other charges. Review all lender terms prior to applying for a personal line of credit.

Read more: How lines of credit can affect your credit score

Factors to Consider When Applying for a Personal Line of Credit

When it comes to selecting a personal line of credit lender, there are several key factors to keep in mind. Let's take a closer look at each.

Interest Rates

One of the most important factors to consider is the interest rate. A good interest rate on a personal line of credit might vary depending on credit score and other financial factors, but generally, you should aim for a rate that's lower than what you'd find on a typical credit card. 

Remember that credit line interest rates are often variable and can change based on market conditions. Some lenders may offer an introductory fixed rate that later converts to a variable rate, so it may be important to read the fine print before applying.

Factors that could affect your interest rate include:

• Credit score

• Income

• Debt-to-income ratio

• Collateral (if required)

Fees

Another important consideration is fees. Some personal line of credit lenders charge annual, origination, or even transaction fees, which could add up over time. It may be helpful to seek out a lender that's transparent about their fee structure and doesn't charge hidden fees.

Common fees to watch out for:

• Annual or monthly fees: Many personal lines of credit have an annual or monthly maintenance fee, typically ranging from $25 to $50 per year.

• Origination fees: To cover any account and processing costs, some lenders may charge a one-time fee upfront, called an origination fee.

• Transaction fees: Some lenders may charge a transaction fee each time you access or withdraw funds from your line of credit, such as a 4% fee for out-of-network ATM withdrawals. 

• Late payment fees: It's not uncommon for a lender to charge a fee for any late payments made. Check if your lender offers a grace period on payments. 

• Over-limit fees: If you mistakenly borrow more than your credit limit, you may be charged an over-limit fee. It may be wise to ask your lender if over-limit fees are part of their fee structure and be careful not to exceed your limit.  

Repayment Terms

When evaluating lenders and their offers, be sure to review the repayment terms. Many lines of credit typically have two phases: a draw period and repayment periods. 

Typically during the draw period, you can borrow money as needed, sometimes with minimum draw amounts, and only pay interest on what you borrow. 

Once the draw period ends, you'll enter the repayment period. During this period, you'll be required to pay back the principal plus any interest. Depending on the lender, the repayment period can sometimes last up to 13 years, but repayment periods of this length are unusual.

You can also look for a lender that offers flexible repayment options, such as making interest-only payments during the draw period or paying off your balance early without a penalty.

Note: Varo Line of Credit¹ doesn’t come with any interest on the funds you borrow but rather a flat, one-time fee that covers the entire amount of credit you borrow. For example, a $600 line of credit comes with a flat $60 fee and a 3-month pay back period. This means that a $600 line of credit with Varo would pay you $600 instantly, then you would make $220 payments each month, for 3 months to pay it off. 

Lender Reputation and Customer Service

Before choosing a lender for your line of credit, it may be important to do your research and ensure they have a good reputation with quality customer service. You could also research their online reviews, check their Better Business Bureau rating, and see if they've had any complaints or legal issues.

Regarding customer service, it may be beneficial to find a lender who offers multiple ways to contact them, such as phone, email, or live chat. Before applying, it may be helpful to reach out to their customer service team with any questions you have to gauge their responsiveness and helpfulness.

Eligibility Requirements

Finally, it could also be helpful to review the lender's eligibility requirements before applying. Most lenders require a minimum credit score and income, and some may even require collateral.

You could also check the lender's website or contact their customer service team to ask about their specific requirements. This may help you avoid applying for a personal line of credit that you're unlikely to qualify for, saving you time and protecting your credit score from unnecessary hard inquiries.

Read more: How to get a line of credit with bad credit

Benchmarking Against Average Rates

When shopping for a personal line of credit, you could ensure you’re getting a competitive offer by comparing rates from various lenders.

For a comparison, a recent report by Bankrate shows that interest rates on personal loans can range from 10.73% to 32.00%, depending on the borrower’s credit score, with the average rate in America being 12.35%. Keep in mind that these are just averages, and your actual rate may be higher or lower depending on your credit score, income, and other factors. If a lender offers you a rate that is significantly higher than the average, it might be seen as a red flag indicating potential risks, lack of transparency, or predatory lending practices. This could lead to increased costs, financial strain, and negative impacts on credit scores, highlighting the importance of careful consideration and comparison of terms before applying.

Negotiating for a Better Rate

If you're unhappy with the initial rate a lender offers, it may be worth your while to negotiate. While not all lenders will allow for rate negotiations, some factors that can improve your negotiating power include:

• A higher credit score

• A strong income and lower debt-to-income ratio

• A long-standing relationship with the lender

• Offers from competing lenders with lower rates

When negotiating, it may be helpful to be polite but steadfast. Let the lender know that you're a responsible borrower and that you may have other options available if they can't meet your needs. If the lender isn't willing to budge, you may want to be prepared to walk away and consider alternative lenders.

Tips for Managing Your Line of Credit

If you decide to take out a personal line of credit, you’ll need to decide whether an unsecured or secured credit line is better for you. Regardless of which type you choose, these tips may help in managing that credit line responsibly:

• Only borrow what you need: Just because a high credit limit is offered doesn't necessarily mean you should use all of it. Typically, you should only borrow only what can reliably be paid back.

• Make timely payments: It can be important to make your payments on time each month in order to avoid potential late fees. Failing to do so could damage your credit score.

• Monitor credit utilization: If possible, try to keep your credit utilization, the amount you've borrowed compared to your total credit limit, below 30% to help maintain a good credit score. Keeping this rate under 10% is often even better.

• Have a repayment plan: Before accepting an offer, it may be important to plan how you'll pay the funds back. Consider setting up automatic payments or creating a budget to ensure you can afford your monthly payments.

​​A Line of Credit Lender for the Everyday Person

Choosing the right personal line of credit lender is a big decision that could significantly impact your overall financial well-being. When you consider factors like interest rates, fees, repayment terms, and eligibility requirements, you may find that a personal line of credit meets your needs and aids you toward financial goals.

At Varo Bank, we're committed to providing our customers with transparent, affordable credit options. Varo Line of Credit¹ is the latest of these products, offering borrowing limits up to $2,000, a flat fixed fee— with no interest, late fees, or prepayment penalties.

As customers continue to bank with us and make on-time payments, their credit limit could improve, demonstrating responsible credit use over time. If you're looking for a flexible, affordable way to borrow money, check out Varo Line of Credit today. 

Get started with Varo today or click to learn more about Varo Line of Credit!

^{1 The Varo Line of Credit is designed to help customers with unforeseen expenses with monthly payments, no late fee, no prepayment penalties, and no interest. To be eligible, your accounts must maintain a positive balance. Minimum monthly deposits, average daily balances, and other eligibility requirements apply. Once qualified for Varo Line of Credit, you will be assigned a credit limit from $600 to $2,000. A one-time fee is added to your borrowed amount, early repayment of your advance does not reduce the one-time fee. Your credit limit may fluctuate from one advance to the next based upon a variety of factors. You may only take one Varo Line of Credit out at a time. Your eligibility information and/or credit limit is always available to you in the home screen of your Varo app. Checking offer eligibility will not impact your credit score. If you are eligible and choose to apply for an offer, we will pull your credit and your credit score may be impacted.}