3 benefits of a line of credit

3 benefits of a line of credit

Is taking out a line of credit a good idea? SSQ Insurance explains the basics of this type of financing.

What is a line of credit?

A line of credit is a predetermined amount that you can borrow.

You can use money from a line of credit up to a maximum set amount approved by the financial institution.

This is a revolving type of financing, meaning that as soon as the outstanding balance is repaid, the amount becomes available to borrow again.

What about repayment?

You are not required to use your line of credit. Just know that you start paying interest as soon as you borrow money from it.

Interest will accrue until you have repaid the entire balance of the line of credit.

You can pay off a line of credit at any time, though a minimum payment is required every month. Its repayment conditions are therefore more flexible than a mortgage loan.

Types of lines of credit

There are several types of lines of credit. Which one you pick depends on your needs.

Personal line of credit

Often requested when you have no specific purpose for a loan, except to deal with the unexpected or even to consolidate high-interest loans.

Mortgage line of credit

You use your home as collateral when you apply for a mortgage line of credit.

Unsecured line of credit

As the name suggests, you do not need to use any of your assets as collateral when you apply for an unsecured line of credit.

Student line of credit

This type of line of credit allows students to pay for some of their post-secondary expenses, such as tuition, books and housing.

What are the advantages and disadvantages of a line of credit?

Advantages

Disadvantages

Lower interest rate than credit cards or personal loans

You must stick to a budget and resist the urge to splurge and go into debt as money is available at all times

No monthly service fees

As it is considered a liability, it may be an impediment to obtaining another loan

Application for financing is more flexible than a mortgage or personal loan

You could have a hard time making payments if interest rates increase

Interest rate is negotiable

Some registration or administration fees may apply

How to determine the amount of a line of credit

A financial institution will want to review your personal finances before approving a line of credit.

It will take the following criteria into account to assess the likelihood that you will repay the amount:

  • Income
  • Debt level at other financial institutions
  • Credit rating and ability to pay your bills and loans on time

Generally speaking, household income must be at least $35,000 for a financial institution to agree to grant a line of credit.

Loan insurance or no thanks?

Similar to your mortgage, a financial institution or your advisor may recommend loan insurance.

This insurance would help you pay off a line of credit in the event of illness, accident, death or job loss.

You are not obligated to take out loan insurance, nor is it required to obtain a line of credit.