Compare Lines of Credit in Canada


What is a line of credit?

Did you know that a line of credit is the most common type of debt Canadians carry? This type of financial product has low interest rates, great flexibility, and helpful repayment terms which contributes to why they are such a staple in borrowing. But what else should you know about lines of credit?

A line of credit is a type of financing from a bank, credit union or other financial institution. You have access to a predetermined amount of money and can use it whenever you would like, so long as you don’t exceed the approved credit limit. There is no outlined use for the funds, as opposed to other forms of financing. The only payment requirement for a line of credit is that the interest be paid every month. The principal repayments can be made whenever its convenient for you.

A line of credit stays with you so long as you maintain payments and keep your account open. You will never have to reapply for it. Some lines of credit may have fees associated with them, like sign up or administrative fees. At first glance, a line of credit may sound like a credit card. Although similar, a line of credit offers more flexibility and significantly lower interest. Let’s take a deeper look at the features of a line of credit below.


How to use a line of credit 

Once a line of credit is secured from a financial institution, you will have access to an account that behaves similarly to a debit account or cash. Lines of credit allow you to write cheques, use ATMs, pay merchants using a card, or make online and tele-payments. Although, when you make a withdrawal from a line of credit, that amount must be repaid at some point. Normally the interest payments are the only thing that’s due each month, but you should avoid racking up line of credit debt that you cannot repay.

A line of credit is a very flexible form of credit which can be used instead of emergency funds, to pay for home renovations, home repairs, vehicles, or virtually any other cost you incur. They can also be used for debt consolidation, investments, school expenses, and to finance a portion of property purchases. However, this doesn’t mean you shouldn’t save and rely solely on a line of credit.

You should receive a monthly statement which will highlight purchases and the total amount owing. Minimum monthly payments are required. The minimum is usually the interest plus any other applicable fees. Although this is the minimum required to maintain a line of credit, proper financial planning will be required to pay off any debts incurred. This includes setting timelines and consistently paying more than just the minimum.


Interest on a line of credit 

Interest on a line of credit is quite different from interest on a credit card or other types of financing. With a line of credit, interest begins to accrue from the very first day you use any credit instead of on a monthly cycle.

This may seem like a drawback, and for day-to-day purchases, it often is. For larger expenses, which will take some time to repay, a line of credit usually offers lower overall interest payments when compared to a personal loan or credit card. In general, you should always take a moment to calculate the cost of financing and compare before proceeding with a purchase.

A line of credit interest rate is usually the financial institution’s prime rate, plus a set rate. The prime rate in Canada for most banks currently sits at 2.45%. Other factors, like an applicant’s income, debt load, and credit score, are considered when deciding what rate to add onto the prime rate. The higher your income, the lower your debt load and the higher your credit score; the better your individual interest rate will be. Because prime rates vary over time, the interest rate on your line of credit will behave like a variable interest rate.


Types of line of credit 

Lines of credit can be broken down into two subdivisions: secured and unsecured. After that, there are various other kinds of lines of credit. Let’s explore these further below.


Secured line of credit

A secured line of credit has an underlying asset that secures the financing. An asset can be anything of value, but normally is a home or other real estate property. If you default or do not repay the credit, the financial institution can take the asset you put up as collateral. Secured line of credits generally help individuals be eligible for lower interest rates and higher credit limits because the lender is taking on less risk.


HOME EQUITY LINE OF CREDIT (HELOC)

A home equity line of credit is a secured lined of credit. It allows an individual to use the positive equity in their home to secure credit from a financial institution. To qualify for the HELOC, a borrower must own a home with at least 20% equity. A mortgage must be for less than 80% of the total value of the home. HELOCs are commonly used for costs of home ownership, such as renovations or repairs.


Unsecured line of credit

An unsecured line of credit is offered more on trust using a credit score and report, among other financial factors, to determine likelihood of repayment and credit amount. Unsecured lines of credit have no collateral attached to them. If you default or do not repay the credit, the financial institution has nothing securing the loan. For this reason, an unsecured line of credit typically has higher interest rates and lower credit limits.


PERSONAL LINE OF CREDIT

This is the most common line of credit in Canada. It is unsecured, the most readily available and lowest risk to borrowers, as they will not lose their home or other valuables if they default on it. For this reason, lenders increase interest rates and lower credit limits. Although, interest on a personal line of credit typically remains lower than interest for credit cards and personal loans.


STUDENT LINE OF CREDIT

A student line of credit is unsecured and issued exclusively to full or part-time students attending a recognized post-secondary institution. This line of credit is designed to assist students with costs of living and education expenses while they are in school. This type of financing could pay for tuition, textbooks, housing, and any other living expenses.

With student line of credits, repayment does not begin until after students graduate from school. Depending on the agreement with the lender, there is even a grace period of a few months after graduation. These measures are put in place to help students manage their debt as they transition to employment. Although repayment is not required while studying, interest does accrue immediately.


Comparison of lines of credits

A line of credit does not come with a set, standard interest rate like credit cards or loans. Lenders determine individual interest rates depending on the applicant’s credit score and repayment history, among other financial factors. When seeking a line of credit, it will be best to contact a few financial institutions and discuss what they offer. From there, you can choose the cheapest, most convenient option.

For a point of reference, here are some details of what big banks in Canada offer in terms of lines of credit:

Financial Institution

Unsecured Limit

Offers

Secured Limit

Offers

Student Limit

Offers

CIBC

$5,000+

Introductory interest rate of 2.45% until November 21, 2021

$10,000+

Introductory Interest rate of 2.45% until November 21, 2021

$60,000 - $350,000

(Depending on field of study)

Interest as low as Prime minus 0.25%

TD

$5,000 - $50,000

Fixed interest rate option

Contact TD directly

Contact TD directly

$20,000 - $80,000

Manageable repayment options. Line of credit will switch to student loan once you are done studies, with foxed payments.

BMO

Up to $25,000

Apply online in 3 minutes.

$5,000+

If your mortgage is with BMO, as you pay it down, you get access to more funds on your line of credit.

$45,000 - $325,000

(Depending on field and level of study)

Contact BMO directly

Scotiabank

$5,000 - $75,000

No annual fee

Contact Scotiabank directly

Contact Scotiabank directly

$1000 - $100,000

12-month grace period after graduation on repayment.

RBC

$5,000+

Contact RBC directly

$5,000 – 65% of the available value of a home

Contact RBC directly

Up to $350,000

(Depending on field and level of study)

Contact RBC directly


LINE OF CREDIT VS LOAN

Both a line of credit and a loan allow you to pay for a substantial expense in exchange for paying a particular rate of interest. Lines of credit and loans tend to have a wide range of purposes, from education to vacation to home renovations. In addition, you must apply for a line of credit or a loan before being able to use the funds.

Where lines of credit and loans vary substantially is with repayment terms and flexibility. Lines of credit can be paid down whenever, so long as you make the interest payments. But with loans, you must make routine, scheduled payments that include principal and interest portions. Also, when you pay off a line of credit, the financing does not disappear. The account will remain open indefinitely which means you can access the funds whenever you’d like. But with a loan, it will disappear when you make your final payment.

LINE OF CREDIT VS CREDIT CARD

Lines of credit and credit cards have a few similarities, mainly in their flexibility. Both can be used for an array of purchases, so long as you don’t exceed the approved credit limit. Also, both financial products can be used indefinitely as they are revolving credit, so long as you keep the account open and manage the debt responsibly.

On the contrary, credit cards usually have higher interest rates than lines of credit making them a more expensive form of financing. The balance of a credit card must be paid in full each month whereas only the interest payments are due with a line of credit. In addition, credit cards do not offer cash, at least not for free, whereas lines of credit are essentially accessible cash.


PROS OF LINE OF CREDIT

  •   Usually have the lowest interest rates
  •   Affordable, interest only payments
  •   Flexibility in use
  •   Choice between secured and unsecured
  •   Revolving credit, with one time application
  •   Depending on if the line of credit comes form a bank, you also bank with, could save on banking fees
  •   Large access to funds, could be hard to manage
  •   Variable interest rates, could become very high
  •   Repayment schedule is your responsibility and not structured
  •   Easy to overspend
  •   Missed payments will hurt your credit score
  •   Secured line of credits put your home or valuables at risk


CONS OF LINE OF CREDIT

  •   Large access to funds, could be hard to manage
  •   Variable interest rates, could become very high
  •   Repayment schedule is your responsibility and not structured
  •   Easy to overspend
  •   Missed payments will hurt your credit score
  •   Secured line of credits put your home or valuables at risk


Is a line of credit fo you? – How to apply

Applying for a line of credit can be an amazingly simple process, with most institutions offering online applications. To get a clearer idea of what each financial institution offers and to discuss your needs, you may want to book an appointment with an advisor or call to speak with someone directly.

Lenders will decide how much credit and what interest rate to extend based off your income, credit score, credit history, other debts you carry, home value and/or your educational program. Most financial institutions will require at least $35,000 to $50,000 annual household income to qualify unless you’re a student. Student line of credits follow a different structure and may require a parent or other person to co-sign.

A line of credit may be right for you if you want a rainy-day fund, need to make a big purchase, want to do home renovations, or are in school and need support while you study. Consider your needs and shop around with different financial institutions. Always maintain your financial health and use credit responsibly to maintain a high credit score and good repayment history.

 

 

 

 

Author Bio

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Mohamed Konate

Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook.