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Lines of credit

From: Financial Consumer Agency of Canada

What is a line of credit

A line of credit is a type of loan that lets you borrow money up to a pre-set limit. You don't need to use the funds for a specific purpose. You may use as little or as much of the funds as you like, up to a specified maximum.

You may pay back the money you owe at any time. You only pay interest on the money you borrow.

To use some lines of credit, you may need to pay fees. For example, you may need to pay a registration or an administration fee. Ask your financial institution about any fees associated with a line of credit.

Interest on a line of credit

Usually, the interest rate on a line of credit is variable. This means it may go up or down over time.

You pay interest on the money you borrow from the day you withdraw money, until you pay the balance back in full.

Your credit score may affect the interest you'll pay on a line of credit. It tells lenders how risky it is to lend you money. Usually, the higher your credit score, the lower the interest rate on your line of credit will be.

Getting money from a line of credit

To access money from your line of credit, you may:

• write a cheque from your line of credit
• use an automated teller machine (ATM)
• pay a bill using telephone or online banking
• transfer money to your chequing account using telephone or online banking

Paying back a line of credit

You'll get a monthly statement showing the amount owing on your line of credit. You must make your minimum payment each month. Usually, your payment is equal to the monthly interest. However, paying only the interest means that you'll never pay off the debt that you owe.

Learn more about paying back debt.

Pros and cons of a line of credit

Before you get a line of credit, compare the pros and cons.

Pros

• You usually pay a lower interest rate for a line of credit than for a credit card or personal loan
• Depending on the product and financial institution, you may not need to pay set-up fees or annual administration fees
• You may avoid fees if you bank with the same financial institution where you got your line of credit. You may be able to have any overdraft on your chequing account transferred to your line of credit

Cons

• With easy access to money from a line of credit, you may get into serious financial trouble. For example, if you don't control your spending
• If interest rates rise, you may have difficulty paying back your line of credit

Learn how to manage your money when interest rates rise.

Choosing the right line of credit for you

You may apply for a secured or unsecured line of credit. Make sure that the line of credit meets your needs.

Banks must:

• offer and sell you products that are appropriate for you based on your:
  • circumstances
  • financial needs
• tell your if they've assessed that a product or service isn't appropriate for you

Take the time to describe your financial situation to ensure you get the right product. Ask questions and make sure you understand the line of credit you have or want.

Different types of lines of credit may include the following.

Secured line of credit

With a secured line of credit, you use an asset as collateral. For example, the asset could be your car or your home. If you don't pay back what you owe, the lender may take possession of that asset. The advantage is that you may get a lower interest rate than with an unsecured line of credit.

Home equity line of credit

A home equity line of credit (HELOC) is a type of secured credit where your house acts as collateral. It usually has a higher credit limit and a lower interest rate than other loans and lines of credit.

Unsecured line of credit

With an unsecured line of credit, there is no asset securing your loan. Some types include personal lines of credit and student lines of credit.

Personal line of credit

You may use a personal line of credit for unexpected expenses or for consolidating higher interest rate loans. Interest rates are usually lower than for credit cards and personal loans.

Student line of credit

A student line of credit is specifically for paying for post-secondary education.

You may use it to help pay for basic expenses, such as tuition, books, and housing.

Learn more about how student lines of credit.

How a lender determines your credit limit and interest rate

A financial institution will ask for personal information when you apply for a line of credit. This is to confirm your identity.

They’ll also review your finances to make sure you may repay your debt and consider:

• your income
• your current level of debt with other financial institutions
• your credit report and score

Financial institutions usually require a minimum household income to approve a line of credit.

What you should know before you borrow

Federally regulated financial institutions must provide you with certain information when you get a line of credit.

See a sample credit agreement for a line of credit.

You may make a complaint if your financial institution doesn't give you all the required information.

Learn how to file a complaint with your financial institution.

Line of credit insurance

Your lender may offer optional insurance for your line of credit, also known as:

• balance protection insurance
• balance insurance
• credit protection insurance

This is a type of credit and loan insurance.

You don’t need to sign up for insurance to be approved for your line of credit. You must give your express consent to obtain this product. The lender cannot insist that you buy insurance.

Learn more about giving express consent for optional products and services.

Make sure that the insurance meets your needs in terms of protection. This type of insurance may help cover your loan payments in cases of illness, accident, death or job loss. This is usually up to a maximum amount.

There are important exclusions in the coverage that line of credit insurance provides. Take the time to read the certificate of insurance before purchasing this insurance. You’ll want to know what it covers and what is doesn’t, as well as the maximum amounts.

The price of the insurance may vary based on your age and the amount of your line of credit. The price may also vary between lenders.

Learn more about credit or loan insurance.

Getting electronic alerts from your financial institution

Your financial institution may send you an electronic alert. They may do so when the credit available on your personal line of credit falls below a certain amount.

These alerts may help you manage your day-to-day finances and avoid fees.

Learn more about electronic alerts.

Related Links

• Borrowing against home equity
• Credit report and score basics
• Credit and loans: know your rights