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Should You Get an Unsecured Line of Credit?



You’ve probably heard of a home equity line of credit (HELOC), a second-mortgage revolving line of credit that’s secured against a percentage of your home’s available equity, which is the value of your home minus the amount you still owe on your mortgage.

When someone has a big home renovation planned or wants to >consolidate credit card or other high-interest debt, that person might apply for a HELOC to help cover costs. However, with this type of line of credit, if you fall behind on payments or default, you could lose your home to foreclosure.

If you want to have more available credit, typically at a lower interest rate than most credit cards, an unsecured line of credit may be a better option than applying for a new card.

1. You can pay for things that a credit card won’t cover

For instance, let’s say you’re in sales and have an unpredictable income or you’re a freelancer waiting on a big payment but the mortgage is due. You can’t typically make monthly loan payments with a credit card. However, with an unsecured line of credit, you could transfer the amount owed to your checking account to cover those loan payments.

Then once you receive the check in the mail or commissions you were waiting on, you can pay off the balance on the line of credit by the monthly due date to avoid paying interest.

Find out: Is a HELOC a Good Idea Right Now

2. You must have good credit

Unlike with a home equity line of credit, where your home serves as collateral, the bank is taking more of a risk with an unsecured line of credit much like a credit card company assumes risk with an unsecured credit card.

To be approved by your bank for an unsecured line of credit, most lenders want you to have a credit score of 690 or higher, according to Forbes.

3. Higher interest than a HELOC or loan but lower than a credit card

Because a home equity line of credit is secured, interest rates are typically lower on a HELOC than the rate you’ll receive on an unsecured line of credit. Interest rates on loans may also be lower. At the same time, you’ll typically pay a much lower interest rate on an unsecured line of credit than on most credit cards.

Keep in mind also that interest rates on unsecured lines of credit are variable, not fixed, the interest rate you receive may rise or fall, depending on the market.

Find out: Can I Improve My HELOC Loan Rates

4. Unsecured lines of credit are flexible

Unlike a loan, where you receive a sum of money and must start repayment immediately, you may never even draw funds from your unsecured line of credit. If you prefer, you can simply keep the line of credit open to use when you need it, such as during a tough cash-flow month.

5. You will have fast access to cash

Once you’re approved and set up an unsecured line of credit, it’s easy to get your hands on funds quickly when you need them by writing a check from the credit line account, withdrawing the amount you need directly from the bank or transferring money from the credit line to another account at your bank.

Find out: 5 Fast Cash Options to Avoid When You’re Desperate

6. Use a line of credit responsibly

While it’s great to have credit available, it’s generally unwise to tap into those funds unless you really need them. Just like with a credit card, you can rack up thousands of dollars more in debt if you don’t stay on top of making payments or paying off the balance completely each month.

If you have a history of running up credit card debt that you can’t afford, an unsecured line of credit may not be a good choice, since the account could be just one more way to get into debt over your head.

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