A line of credit is a financial account that offers you the option of borrowing money up to a certain limit. You can take out loans, or cash advances, when you need them, and use the money for any personal, family or household expense.

If you have cash flow needs that will change over time, a line of credit may help you accomplish your financial goals. So, what is a line of credit, and how do you get one? Learn the key features of a line of credit, how it compares to other types of debt and how it could benefit you.

How does a line of credit work?

A line of credit is a form of revolving credit that lets a borrower access the funds on demand, up to specific limit. Unlike an installment or payday loan, you can open a line of credit without immediately borrowing money. When the need arises, you can take a draw from your line of credit up to the max amount. Typically, you’ll only pay interest or fees on the amount you borrow, not the unused credit limit. And as you pay down your balance, you can borrow against your credit line again without having to reapply for a new account.

Applying for a line of credit is similar to the process of applying for a loan. You’ll start by providing information to a credit union, bank, or online lender. The financial institution typically performs a credit check and evaluates your creditworthiness to determine your rate and how much you can borrow.

What else should you know about a line of credit?

Lines of credit can be secured or unsecured. A secured line of credit requires you to put up collateral, such as the mortgage on your house with a home equity line of credit (HELOC). As a result, secured lines of credit tend to have lower interest rates than unsecured lines of credit.

Elastic is an unsecured line of credit, which can be applied for even if you don't have equity in a home to secure a line of credit. Instead of charging an interest rate, Elastic is structured with just two fees: one for requesting a Cash Advance and one for having a Carried Balance from one month to the next.¹

Is a line of credit a good idea?

Personal lines of credit can be a good option when you don’t know exactly how much money you want to borrow and can also be used for unexpected expenses. In these cases, a line of credit gives you the flexibility to take out money as needed but avoid paying interest or fees until you actually borrow the money.

A good example is a home repair project. You may want to tackle things in stages over a period of time, giving you time to find good deals on supplies and labor costs. If you’re able to make a lot of progress in one month but are limited by your monthly income and savings account, you can tap into your line of credit to go ahead and make those purchases. Then, when you get paid again, you can pay off those draws or carry a balance and pay off your outstanding balance a little more slowly.

What is the difference between a loan and a line of credit?

Loans are usually for a fixed amount and term, and sometimes for a particular purchase, though there are personal loans available that are for a fixed amount but without a stipulation about how you'll spend the money.

A line of credit gives you the option of applying for credit without knowing the exact amount or reason you may need to borrow at the time you apply. You could have a line of available credit open for months before using it, then get funds quickly when you need them.

What are some of the pros and cons of a personal line of credit?

A line of credit can have several benefits, including:

• Quick access to cash. With an Elastic line of credit, you can often have the money in your checking account within one business day.²

• Flexibility. Rather than having to know exactly how and when you'll spend the money, a line of credit flexes with your cash flow needs.

• Control over fees. Only pay fees on the amount you borrow. With Elastic you pay a Cash Advance Fee for every draw you request and a Carried Balance Fee if you carry a balance from one billing cycle to the next.¹

The potential downsides of a line of credit include:

• Additional fees. In addition to the interest rate on the amount borrowed for some lines of credit, you may also pay a fee when you request an advance or carry a balance over time.

• Higher interest rates. Secured loans or lines of credit typically have lower interest rates.

• Credit report required. Depending on the lender, you’ll likely need some credit history and at least a fair credit score in order to be approved for a line of credit.