What is a line of credit and how to apply

A personal line of credit is a preapproved loan that lets customers borrow money at any time. The loan, plus interest, is then paid back as determined by the rules of the financial provider.

What you can use a line of credit for

A line of credit can generally be used for most purchases. People often use it as a backstop when they need a little extra cash, as a way to pay for a large item or unexpected purchase without putting it on their credit card, or to fund a side hustle or small business. This can help people avoid going into credit card debt and having to pay extra fees.

A line of credit typically doesn't have a fixed repayment schedule, potentially offering flexibility for repayment. However, it may have higher interest rates, which means someone likely wouldn't use a line of credit to make a large purchase like a home or car. And, as is the case when buying on credit in any form, customers should always ensure they’re spending within their means and staying on top of their payments and spending.

By using a line of credit responsibly, customers can help maintain control of their finances, overcome a cash crunch, and stay out of debt.

How to apply for a line of credit online

Many financial institutions offer their customers the option to apply for a line of credit. It’s possible to apply at a bank or online through online financial providers. The process will vary depending on the lender and fees, interest, and other costs may apply.

Below is an example of the typical process for submitting an application for a line of credit.

Start the application

Different lenders may extend varying amounts of credit, along with offering numerous terms and conditions. Customers can consider their current financial standing — including their credit score, income, and existing debts — to find a provider that suits their individual situation.

Once a specific lender is identified, potential customers could fill out an online line of credit application. If the lender is a bank with physical branches, potential customers may also be able to fill out an application in person.

Submit the application

Once the application has been finalized, there may be additional documentation required such as a paystub, bank statement, or driver's license. This can usually be submitted online, but some institutions may require a hard copy in person.

Application approval

Once an application has been submitted, the financial institution or online provider will review it and make a decision. Often, this is done automatically by their computer system, allowing approved customers to access their line of credit immediately. However, some banks may review applications manually, which means customers won't be able to access funds until the review has been completed — generally taking a few days.

Once approved, the provider will connect with the customer to provide information on how to access funds and the process for repayment. If the line of credit includes or is connected to a payment card, the provider will begin the process of shipping the card to the customer at this time as well.

If an applicant has a low credit score or no credit history, their application may be rejected. They can work with the financial institution to learn how they could gain approval when/if they are able to reapply — some potential suggestions may be paying down current debts, building up their credit score, or utilizing a co-signer. There are also some lenders that work with customers with low credit scores, though they may offer higher interest rates or stricter terms and conditions. While there are options available, it isn’t wise to submit multiple or too many credit applications. Doing so can damage a credit score due to too many credit inquiries.

It’s important to review all information given by the provider before applying to ensure the line of credit makes sense for the applicant. As always, spending within one’s means is critical. While having access to a line of credit may offer more financial flexibility, it is key to make credit payments on time and, ideally, in full to avoid any potential interest, late fees, or penalties.

Learn about PayPal’s credit services here.