Lines of credit for april 2023

What is a line of credit?

A line of credit is a relatively flexible financial instrument where you borrow money up to a preset limit. This can done by writing checks or using a bank card to make purchases, or via cash withdrawals. Borrowers can use the funds as they see fit. However, since it is a commercial financial instrument, there is a charge for it. Payments can be made up of two parts: a constant rate for the life of the loan and a one-time fee for disbursing the loan (disbursement fee, administrative fee, etc.) The total cost of the loan is the cost to the borrower.

The credit limit depends on your financial behavior, previous borrowing, and income. The upper limit or maximum credit amount for your credit line means that the credit is sustainable for you in total and that you can not only pay the interest but also repay it without going into collection.

A credit line is temporally limited. There are two dimensions for the borrower:

• a credit line must be repaid within the agreed period, so it is a kind of a term loan;

• withdrawals from the credit line may not exceed the approved credit limit.

If your withdrawals have reached the maximal limit, your lender will suspend the funds' disbursement until you either repay a portion of the drawn limit or enhance your credit limit.

A line of credit may have a high limit, but if you have drawn down only $1,000, you will be charged interest only on that $1,000 and not on the rest of the amount, which is "dormant" because it has not been disbursed.

A line of credit may be similar to an overdraft, but it is different:

• overdrafts usually have a shorter credit period;

• the overdraft depends on the turnover of the account (if it is a business overdraft, it is linked to the business income flowing through the account opened with the lender).

A line of credit is a suitable tool for individuals, entrepreneurs, and companies. It helps to compensate for liquidity gaps when you have higher expenses, and your income is not enough, or you know you will not use the entire borrowed amount simultaneously. It is convenient to be approved for a more significant amount and use it in parts when needed instead of applying for multiple loans. Borrowers save on credit lines because they pay interest to financial institutions on better terms, especially having fixed interest rates.
When interest rate in floating future rate can be much different from the prime lending rate, but there is an option of getting refinanced to ensure minimum payment of interest cost. In addition, if you have one credit line, there was one hard inquiry affecting your credit score; while you have multiple loans, more checks would leave a mark on your credit score. According to open sources, a new hard inquiry lowers your credit score, and the future of your credit history depends on how you service your borrowing.
Among other credit tools, a credit line works for consolidating debt where you can borrow money, repay other loans and withdraw funds for different needs using available credit. Lines of credit are not the same as a chequing account, but you can transfer funds to another account or directly arrange payment of bills from your online banking. Often lines of credit are used by individuals for home renovations where one has to write cheques step by step based on the progress.

Types of lines of credit

Like other loans, lines of credit are granted for a limited time, and a borrower must pay for the use of the credit and return it before the deadline specified. However, the borrower is not restricted to a specific money use with this credit instrument.

• Credit lines can be categorized according to various criteria. One of them is whether collateral is provided, i.e., secured lines of credit or whether there is no collateral to reduce the lender's risk.

Unsecured lines of credit are more convenient for borrowers but are generally available to customers with high credit scores.

• The second criterion is the procedure for disbursing a loan. There are revolving and non-revolving lines of credit. With revolving lines of credit, a borrower can repay a portion of the credit and use it again later within the approved limit and credit period. Non-revolving lines of credit are a fixed amount where each drawdown is deducted from the agreed limit, and repayments would not restore the amount available for borrowing within the line. Therefore, you must make do with the remaining balance.

• Depending on the borrower, lines of credit may be intended for

• personal use (for individuals);

• for small businesses;

• for large companies.

The second and third categories usually differ in the amount of the limit. Usually, banks require the company to transfer all its cash flow to the lending institution to control the situation.

The lender evaluates FS, the company's market value, etc., and the collateral (if it is a secured line).

• Another significant category is HELOC (Home Equity Line of Credit), where real estate is used as collateral, and the estimated value determines the approved limit. It is usually no more than 80% of the property value, less the outstanding mortgage. The average term is ten years and may be extended. The principal is repaid at the end of the period. Such loans involve additional costs for the borrower, e.g., property valuation, collateral paperwork, etc.

• The difference is that the lender can demand principal repayment at any time, while the borrower can only pay the interest until then.

• A credit line based on securities is secured, as seen from the title, and securities owned by the borrower are used as collateral. Typically, the limit can be set up to 80% based on the value of the securities.

• A student line of credit is given to cover tuition and other studies-related expenses. Lenders require confirmation that the borrower is a student.

• Lines of credit can come with fixed and floating interest rates. Fixed ones would have an unchanged interest rate during the loan life, while floating ones will change, affecting the loan's cost.

A personal line of credit

A personal line of credit is a convenient way to refinance or consolidate other debts bringing them to one lender with better terms, paying your bills, and covering other expenses. Customers can draw funds when needed and pay only for what they use. Depending on the loan product and borrower eligibility, a line of credit can be secured and unsecured. Depending on the borrower and its products, interest rates for personal lines can be fixed and floating, which vary based on the market changes and may wing up as high-interest rates making your debt bigger. Lower interest rates are available for excellent and good credit score clients. Such a loan can be used for any purpose, including for purchasing a car at the moment when you find your best deal.

Home equity line of credit (HELOC)

Home equity is used as collateral for such a credit line and is used as collateral. The maximum amount is determined upon home appraisal and is never equal to 100%. Borrowers bear the extra cost to cover appraisal and collateral procedures, plus other additional fees the lender applies (if any). Repayments can be made at your own pace. Often it is used for renovations, remodeling of houses, and other residential equity.

Business line of credit

Financial institutions help business to reach their short and mid-term goals. Depending on the lender and terms, there can be additional feel like:

1. a setup fee is paid when the loan agreement is signed;

2. an amendment fee when a business signs an amendment agreement;

3. a renewal fee is paid every 12 months from the effective offer date.

4. an interest rate can be fixed or floating, and the line may be attached to a chequing account.

Demand line of credit

Such loans are beneficial for lenders because they secure liquidity and can repay the outstanding balance (used part of approved higher maximum credit limit plus interest) at any time. Open sources say that such lines typically use variable interest rates. In addition, it can be secured or unsecured line.

Such a line may be used to make bridge financing, financing new business or start-up, cover the cost of minor assets, etc.

Securities-backed line of credit (SBLOC)

If a borrower is interested in holding their investment portfolio but needs financing, such a line of credit is a good solution. Some financial institutions allow borrowing up to 100% of the value of the security. However, such loans require confirmation of the securities ownership and income verification, and the limit also depends on the securities offered as collateral.

Student line of credit

While in school and after a limit is approved, a student can use this loan to cover tuition, monthly living expenses, and book expenses. When a student leaves school, the line of credit becomes a student loan.

Pros and cons

Pros

• It is a one-time approval that saves time, and then a borrower can dispose of the money within the unused limit at any time under the loan agreement;

• flexible repayment schedule at the borrower's own pace;

• minimum payment since the regular installment consists only of the interest, and the principal will be repaid at the end of the term unless you want to reuse the available limit if the product allows it;

• it is possible to repay the loan faster if you make additional payments;

• multiple uses of the borrowed money: possibility to pay for expensive tuition, renovation, car purchase, current expenses, urgent bills, etc.;

• ability to retain equity and obtain financing (secured lines of credit);

• low-interest rates for high credit scores and much lower anyway compared to credit cards and payday loans.

Cons

• If the borrower's credit score is not very high, the chances that the lenders’ approval of an unsecured credit line with a low-interest rate are meager;

• lines of credit require a strong financial discipline if you want to repay them early, and even for regular repayment, you need to set aside money to cover the repayment rate. If you do not take it seriously, the best-case scenario is a vicious cycle of loans where you only pay interest;

• if a loan is secured until repayment, the borrower cannot freely dispose of the secured equity (sell, exchange, give away, etc.);

• a variable interest rate can make the loan cost much higher than expected.

Ways to get a line of credit

You can apply for a line of credit at:

• a bank;

• a credit union;

• an online lender.

A line of credit may be linked (depending on the terms approved by the lender) to a checking account, bank card, or another type of account.

How to apply

The application can be made online or offline. You can usually find the full terms for your particular case from a credit expert who has analyzed your credit history, collateral, etc.

One can set up a meeting and discuss all details at the bank branch or via a phone call before signing a credit agreement.

Another way to apply is to use web banking or a mobile app if it has such a feature.

Requirements

The basic criteria are:

• age of majority and legal capacity;

• citizenship and residency, Canadian registration of the company if a lender has such restrictions;

• confirmation documents for the possession of equity/ securities or college/university enrollment;

• a stable income;

• good or excellent credit score (usually);

• co-signer for students (not required by government institutions);

• FS and other documents confirm the revenue registration, signatory powers, and business value for business loans.

Legal regulation

Lines of credit are regulated by federal and provincial legislation. General regulations are provided by Federal Investment Act, Consumer Protection Act, and Criminal Code. For example, in Nova Scotia, there is the Unconscionable Transactions Act; Alberta has its own Consumer Protection Act. Thus, depending on the province, one has to look closely at the legislation designed to protect clients from unfair loan terms for various loans, including lines of credit and personal loans offered by financial institutions.

How to repay a line of credit

The principal is paid at discretion or at the end of the term, while the interest (meaning your minimum payment) on the use of the credit should be repaid regularly:

• monthly;

• be-weekly;

• weekly, depending on your payment schedule.

The actual cost of a line of credit

The interest rate is only part of the line of credit's real cost. It depends not only on the lender but on the product and your risk profile.

In addition to interest payments, you have to add (if applicable):

• origination fee;

• disbursement fee;

• amendment fee;

• renewal annual fee;

• bank accounts fees;

• transfer fees;

• expenses of checking the title;

• cost of home evaluation;

• fees for registering collateral;

• required insurance etc.

Some of these fees are paid once; some are recurrent, but all costs related to the line of credit should be considered.