How a line of credit works

A personal line of credit gives you the ability, but not obligation, to borrow money as needed. Your credit limit can depend on your creditworthiness and the lender, but you can take out smaller loans against your total limit.

You may only have to pay interest on the amount you borrow, although that interest could start to accumulate right away. You may also have to pay an annual fee, often around $25 to $50, to keep your account open, even if you don’t use the account.

Depending on the account, you may be able to make a draw as a cash withdrawal, bank transfer or with a check linked to the account. Some accounts charge a fee on your withdrawals — or draws, as they’re called — depending on how you get the money.

Once you’ve taken a draw, you may only have to make minimum monthly payments on your loan, although paying more than the minimum could limit how much interest accrues. Or, each of your loans may have a fixed repayment period and set monthly payments.

Some personal credit lines may have an initial draw period — a several-year period when you can take draws against your credit line. You may need to make at least minimum payments during the draw period, and once it ends and your repayment period starts your monthly payments may increase.

Personal credit lines may be unsecured or secured. Secured lines of credit require you to put up collateral, such as funds in a certificate of deposit account or your home (for a home equity line of credit or HELOC) that the creditor can take if you don’t repay your loan. A secured line of credit may have additional fees, such as closing costs on a HELOC, but you may be able to get a much larger credit line. Unsecured credit lines are offered to borrowers based on their creditworthiness and promise to repay the loan.

When to use a line of credit (and when not to)

Opening a line of credit could be a good idea if have a series of upcoming purchases to make. Say, for example, that you’re renovating a room in your home and will make progress payments to a contractor before purchasing new appliances or furniture later. Rather than taking out one large loan and paying interest the entire time, you can take out several smaller loans from your credit line and minimize how much interest accrues.

You may also be able to find a line of credit that doesn’t require any annual fees. Keeping a personal credit line open could be an OK option as an emergency fund. Although ideally, you can save up enough cash to build an emergency fund, a credit line could help you get cash at a predetermined (and hopefully low) interest rate.

A credit line isn’t likely the best option for regular expenses, as you’ll end up taking out, managing and paying interest on multiple draws. If you find yourself frequently short on money, focusing on decreasing your expenses or increasing your income should be a top priority.

Additionally, if you need to take out a single loan for a specific purpose, you may want to use a personal loan rather than a line of credit. Personal loans are installment loans that can be secured or unsecured, and you may be able to qualify for a lower fixed or variable rate than you could get with a credit line.

Many large retail stores that sell furniture have a deferred-interest financing program that allows consumers to open up a store credit card in which there may not even be a required minimum purchase.

The store may let you finance the piece of furniture you buy for a 0% interest rate for a period. The interest-free window could be one to six years, depending on the creditor. After that point, the APR could jump to 20% to 25%, or even higher.

Ashley HomeStore, for example, has a store card with a 29.99% APR and it offers interest-free financing for up to 72 months. Rooms To Go’s store credit card has the same APR, and it offers 0% interest from September 2018 through February 2023.

The key thing to understand is the deferred interest clause that can come with these types of cards. This means that if you don’t repay the entire principal amount before the promotional window closes, the credit card company will retroactively charge all the interest it would have charged.

“They might have 0% interest for 24 months, but if you don’t pay it all off in 24 months, your interest is calculated back from day one and added to your balance,” said Jude Boudreaux, a certified financial planner and founder of New Orleans-based Upperline Financial Planning. “It’s a tremendous penalty.”

Let’s say the store offers to sell you a couch for $3,000, interest-free for 12 months. You will have no problem if you pay the $3,000 off in month 12. But if you leave even $1 on the credit card after that 12-month period is over, you might owe $750 in interest if the regular interest rate is 25%. Ouch.

– Read why rent to own furniture specials is a bad idea!

Enjoy an interest-free loan — if you meet the promo requirements

In-store financing could be a good deal as long as the buyer pays off the money borrowed within the 0% interest rate period.

For someone who doesn’t have enough savings to cover the furniture, instead of cashing their emergency fund, taking a 0% interest rate loan is a better, safer choice. But make sure you pay it off before the term is up to avoid retrospectively accrued interest.

Get new furniture right away

With a financing offer, you can go in and buy the items that you’ve been eyeing right away even if you don’t have all the cash on hand to purchase them.

The trick here is to stop yourself from going overboard to the point where you’re left with unaffordable monthly payments or you aren’t able to pay the card off before the promotional period ends.

“Be very careful because it’s easy to overspend when you have the ability to borrow like that,” Boudreaux said.

Help build your credit

Those who don’t have a stellar credit score may also have an opportunity to build credit with a store card. Often, the furniture sellers work with a financial institution that issues those store credit cards, and sometimes the credit company reports to one or all three credit bureaus. Check with the retailer before you apply for the card to see if it reports your payments to credit bureaus.

And, keep in mind, this can work against you as well. If you miss payments, it will hurt your score. Simply applying for new credit can temporarily ding your credit score. For that reason, ask the store if it offers a soft pull prequalification. You can get a good idea of whether you’ll get approved for financing without having to agree to a hard credit pull.

You may have to make a large interest payment

Zero-interest financing deals can be a great idea if you can pay off the money borrowed within the promotion period. But, in real life, many may not be able to do so. The big caveat here is that if you don’t repay the entire principal amount on time, you may be on the hook for interest.

On top of owing deferred interest going back to the beginning of the date of purchase, the credit card company will continue to charge interest until you repay the full amount owed. Remember, those cards carry pretty high-interest rates — higher than a typical credit card’s interest — so once the regular APR kicks in and you’re hit with all the deferred interest charges, it gets very expensive very quickly.

“They know that there’s a percentage of people that won’t pay the balance within the promotion time,” said Juan Guevara, a certified financial planner based in Colorado. “That’s how they make their money.”

Save up cash

Some people may not realize that if you want to buy furniture, you’re going to be making a payment no matter what. Instead of getting a loan, you might as well save up cash to pay for it. This strategy will keep you from the risk of having to pay high interest retrospectively if you can’t repay the loan within the promo period.

If you are disciplined enough to save up for a piece of furniture, the chances of you splurging are slimmer than someone who borrows money with a loan or credit card.

Offer to pay cash upfront and ask for a discount

Another advantage of purchasing furniture with upfront cash is a potential discount you might be offered.

As we discussed earlier, offering financing options costs money for the retailer. You are in a disadvantaged position to negotiate with the retailer for a discount if you take the financing deal. But if you offer to pay for furniture with cash in full, then you have the bargaining power.

Use a 0% intro purchase credit card

Before you accept a retailer’s in-store financing, even if it has a 0% intro APR, consider bringing your own financing to the table. There are some good 0% intro purchase APR cards on the market. And regular credit cards usually carry a lower interest rate than retail store cards, which can save you a bundle if you’re left making payments after the promo period ends.
If you’ve got a credit card that will offer you a 0% percent introductory rate on purchases,
compare its regular interest rate with that of the furniture store credit card. Choose the lower-cost option in case you cannot pay off the balance by the time the promotional 0% interest period is up.

Complete a balance transfer

If you sign up for in-store financing (a credit card) but can’t pay the balance off before the interest-free period ends, you’re at risk of getting hit with deferred interest charges.

To buy yourself more time, consider using a balance transfer credit card.

With a balance transfer, you can possibly roll over your debt from the store credit card to the new card that has an introductory interest-free period. The promotional 0% interest period typically lasts from 12 to 21 months. You usually have to pay a one-time balance transfer fee, which is often 3% of the amount of the transfer.

You’ll need good credit to qualify for the best balance transfer offers. And, keep in mind, you cannot transfer balances between credit cards issued by the same company.

Use a home equity line of credit

Another way to rustle up some extra funds is by using a home equity line of credit (HELOC). A HELOC is a revolving credit line. It’s secured by your house. You can apply for a HELOC, leave it open and draw funds from it as needed. Draw periods usually last for up to 10 years. As you pay off the principal, your credit gets replenished and you can use it again. You only pay interest on what you borrow.

The HELOC likely carries a lower interest rate than other unsecured financing options such as a credit card or personal loan. If you’re uncertain whether you can pay off the balance of in-store financing, and you fear you’ll get hit with a penalty or deferred interest charges, it can be a safer bet. You can avoid the possible penalties that come with the in-store financing offer.

Take out a personal loan

An increasing number of people have taken out personal loans to buy furniture. According to data from the Federal Reserve, the average personal interest loan rate was 10.31% in the second quarter of 2018. Financial experts generally don’t recommend this option. Although it’s lower than a typical credit card interest rate, it’s higher than your HELOC interest rate, if you have one. Your earning potential could offset the higher interest rates. Compare multiple lenders at once with our comparison tool below!

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Terms

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Rent-to-own

Some stores offer rent-to-own programs that allow customers to take the furniture home and make installment payments. Renters can potentially own the furniture after they pay the total cost. But take note: These plans can be significantly more expensive than outright purchases. It’s technically not a loan, so there’s no disclosed interest, but the extra renting costs are usually calculated into the installments.

“By the time you own it, you may have paid triple the amount (of the regular price), so in essence, your interest rate could have been a lot higher,” said Chris Dlugozima, a financial wellness expert at GreenPath, a nonprofit debt and consumer credit counseling.

Bottom line

In-store furniture financing can be to your advantage as long as you stay within your budget when you buy and pay the debt off on time. But if you can’t be sure that you can repay the entire balance during the 0% interest rate period, think twice before you open that store credit card. At the end of the day, the expense has to come out of your cash flow. Compare your options, look at your financial situation and choose the one that comes with fewer risks and less potential cost.

A rent-to-own furniture agreement, also known as lease to own or a lease purchase, is a payment plan in which you agree to make installment payments for new — or gently used — furniture. You can exit the contract anytime by either returning the item or purchasing the furniture for a lump-sum payment. After the agreed-upon number of payments are made, you own the furniture.

Generally, the rental company doesn’t run a credit check for a rent-to-own plan. Instead, a prospective renter may need to provide proof of income and an address — as well as submit personal references — to enter a rent-to-own agreement.

The risks of rent-to-own deals

The risk with these agreements is that the monthly payments required often add up to much more than the sales price of the furniture.

On top of the base payments, a rent-to-own agreement may include mandatory and optional fees that increase your cost of purchasing the item. A few examples of these fees would be:

• Processing fee
• Delivery and pickup fee (if not included)
• Setup/installation fee (if not included)
• In-home collection fee (if they send someone to your home to collect a payment)
• Excessive damage fee (if you break the item or the item is returned with damage)
• Reinstatement fee (to continue renting if you miss a payment or make a late payment)
• Loss and/or damage waiver fee
• Membership fees
• Late payment fee

Let’s say, for example, you enter into a rent-to-own contract with one of the largest and most popular rent-to-own retailers in the U.S., Rent-A-Center. As of this writing, Rent-A-Center advertised an Ashley Furniture dining set on sale for 14 monthly payments of $104. After 14 months, you will have paid a whopping $1,382.69, excluding taxes and applicable optional fees, to become the owner of a now year-old dining set.

The same dining set is on sale at Target for roughly $590, excluding tax. In this case, the rent-to-own agreement costs nearly 2.5 times more, essentially the same as paying a 200% APR.

The high rate is similar to rates charged on expensive borrowing products infamous for trapping consumers in debt such as payday, pawn shop and auto title loans.

“Overall, rent-to-own programs often charge high rates that leave consumers paying significantly more than the furniture they are buying. That’s not worth it for any consumer,” said Adam Garber, of the U.S. Public Interest Research Group (PIRG). “You should think long and hard before entering any such deal and explore alternatives.”

On top of the payments, mandatory rental fees and applicable taxes, you may be encouraged to tack on optional fees such as, for example, a membership fee for the Rent-A-Center Benefits Plus program. The program comes with extra product protections, coupons and discounts with some other retailers for an additional $3 a week, or $13 a month.

Rent to own isn’t limited to furniture. The plans can also apply to consumer electronics, appliances or even car tires.

Take, for example, the popular Nintendo Switch gaming console. After 12 monthly payments of $115 to the other big-box renter in the U.S., Aaron’s, you’ll have paid $1,379.88, excluding taxes and applicable fees, to own the console. Meanwhile, you could buy a new version of the same console from Best Buy for $299, excluding tax.

Getting out of a rent-to-own contract

Most contracts allow you to exit the contract anytime, by either returning or buying the furniture. You are not obligated to continue the contract into the next period or to purchase the item. Most plans give you the option to buy the furniture by making an early, lump-sum payment equal to some or all of the remaining rental payments. Some companies also let you upgrade the item to a newer version anytime, which may mean entering a new agreement with a different monthly payment.

But if you choose to return the item, you will not be reimbursed for any of the money you’ve paid into the agreement.

If you fail to make the required payments, the company will likely repossess the item and may charge a late fee and/or other related fees. If you catch up on payments and want to continue the agreement, you may be charged another fee to reinstate the plan. If the company determines you have damaged the piece, you may be required to pay an excessive damage fee or buy the item.

Questions to ask before you sign a rent-to-own agreement

Garber does not recommend using a rent-to-own plan in any circumstance. But, he said, a consumer who is considering entering a rent-to-own agreement “should do everything in [their] power to make sure that the contract protects [them] from additional charges down the road.”

If you do choose to go with a rent-to-own agreement, Garber recommends asking the following before you agree to a plan:

• Will you be charged any additional fees outside of the monthly payment?
• What happens if you miss a payment?
• What’s the full cost of the rent-to-own plan, including fees?
• Will you be charged for services such as cleaning, repairs or replacements?
• Will you be charged a return fee?
• What are the service fees? In some contracts, the company may charge a fee for services such as repairs and replacements for the duration of the deal.

Are rent-to-own plans regulated?

Depending on how the deal is structured, a rent-to-own plan may not be covered by federal lending laws, which require certain disclosures and provide consumer protections. But the plan may be covered by state laws regulating rent-to-own transactions. The protections vary depending on the state in which you live. You can check with your state’s attorney general to learn if your state has enacted protections, and to see what those protections entail.

Even if you don’t have much cash on hand at the moment, it may be worth it to you to explore all possible alternatives before deciding to use rent-to-own financing. In some cases, it may even be cheaper in the long run to borrow using a credit card or a personal loan.

In conclusion

Rent to own is usually a bad deal. Those who use rent-to-own financing often pay double or more than what they would pay if they had saved for and purchased the item. If you are considering using rent-to-own financing to buy furniture, it’s recommended you explore all other available options, including using in-store financing or borrowing with a personal loan, before entering a rent-to-own agreement.

1. Make sure you meet the minimum eligibility requirements

Each lending platform sets its minimum eligibility requirements for applicants. Generally, you can expect the following factors to be considered as you apply:

• Your credit history and credit score
• Your income and outstanding debts
• Your history with the P2P lender
• Whether you’re at least 18 years old
• If you live in a state where the lender operates
• If you have a bank account

To qualify for funds on Prosper, for instance, you must have a debt-to-income ratio that’s below 50 percent, at least some income and fewer than five credit inquiries during the past six months. You must also have a FICO credit score of 640 or higher, according to one Prosper representative.

Alternatively, Peerform and LendingClub look for minimum FICO scores of 600 and maximum debt-to-income ratios of 40 percent, which may make it a better option for some borrowers.

Meeting the minimum qualification requirements doesn’t guarantee that you’ll get approved for a loan. But knowing what the qualifications are upfront lets you avoid applying when you don’t have a chance of getting approved.

2. Try to get a preapproval with a soft credit pull

Some P2P lenders offer loan preapproval with a soft credit check. Unlike a hard credit check, a soft pull won’t impact your credit score.

Although getting preapproved doesn’t guarantee that you will get approved for a loan with the same rate and terms, it could be a quick and easy way to see if you meet the basic credit requirements.

3. Consider how much you need to borrow

Most P2P lenders set minimum and maximum loan amounts. For example, Prosper offers loans from $2,000 to $40,000, while LendingClub offers loans from $1,000 to $40,000. Even if you meet the P2P lender’s requirements, you may only qualify for a lesser amount depending on your creditworthiness.

Before applying, make sure your desired loan amount falls within the lender’s range. If you need to borrow more than the lender allows, you may want to turn to a different lender or type of loan. For example, you could apply for a personal loan for up to $100,000. Or you may find that it’s easier to get approved for a large secured loan, such as a home equity loan.

4. Prepare your paperwork and verification documents

P2P lenders may require a variety of verification documents to complete a loan request. Having these on hand when you apply could help you quickly get through the application process.

The specifics can vary by lender, but needed documents may include:

• Recent pay stubs, bank statements and tax returns
• A copy of your driver’s license or other government-issued ID
• Proof of your current address from a recent utility or telecom bill

5. Look for ways to improve your credit score

If you don’t meet the lender’s minimum credit score requirement or think you may be able to get a lower rate with a better credit score, you could try to improve your credit before applying for a loan.

Improving your credit takes time, but if you can find and dispute errors on your credit report, that could lead to a quick change. Another option is to pay down your revolving debt, such as what you owe on credit cards.

Some P2P lenders may also allow joint applications. You can get approved for a loan by applying with a creditworthy cosigner. But both borrowers would be legally responsible for repaying the debt.

Pros of using a P2P lender

Cons of using a P2P lender

As with any contract, you’ll want to carefully review the loan documents before signing. There are a few fine-print items that you may want to pay particularly close attention to with peer-to-peer loans. Some of these you may be able to research ahead of time and then double-check when you receive an official loan offer.

• Loan rate: The annual percentage rate (APR) on your loan takes origination fees, compounding interest and your loan’s terms into account to show your true cost of borrowing. You should compare the APR you’re offered by different lenders when considering which loan offer to accept.
• Loan fees: P2P loans may have an origination fee, late payment fee, check processing fee, insufficient funds fee or other types of charges. Read over the loan’s terms carefully so you’ll know when and why you’ll have to pay a fee, and how to avoid paying them. If your loan has a prepayment penalty or pre-computed interest, you may want to look for a personal loan from a different lender.
• What happens if your loan isn’t fully funded: Because P2P lenders may treat partially funded loans differently, know what could happen before you decide which lender to work with to try to get a loan. If you have a short deadline for when you need the loan, you may want to consider a non-P2P lender.

Where to compare P2P lenders

You can compare P2P lenders and other lenders that offer similar types of loans by visiting each financial institution’s website. But you could also use our personal loan marketplace to review each lender’s loan terms, rates, fees and minimum credit score requirements.

Using our marketplace, you can input your credit score, desired loan amount and ZIP code to view lenders that suit your needs.