A line of credit is a type of loan issued by a bank or other financial institution. It is like a credit card because it offers a limited amount of funds to borrow. A secured line of credit will typically have a lower interest rate and a higher credit limit because they are considered lower risk for the lender. This is because a secured loan is secured by an asset, such as your house, which is really helpful as many Canadians have significant equity in their home. In March 2021, Mortgage Professionals of Canada published the Annual State of the Residential Mortgage Market in Canada, and they reported Canadian homeowners have an average home equity of 73 per cent of their home’s value.
1. How much will it cost per month?
A line of credit will charge interest as soon as money is borrowed. The amount of interest charged is normally calculated based on your credit score and your relationship with the bank. You will be required to pay a minimum monthly payment based on the balance owing. The minimum payment is normally the interest accrued during that time. As with any form of revolving credit, if you carry a balance, you should pay more than the minimum payment each month.
2. What can a line of credit be used for?
A line of credit can come in handy in the event you need money for an emergency, such as a furnace failure or car problem. If you don’t have an emergency fund to pay for these unexpected expenses, a line of credit can be better than a credit card due to the lower interest rate. If you are using your line of credit regularly, it might be time to look at your current financial situation.
3. When should a line of credit be opened?
Only you can decide whether you should take out a line of credit. It is best to only use credit when you absolutely need it. If there is something you want, opposed to something you need, you should still pay for these with money you have saved. Treating your line of credit as a loan will ensure you are using it responsibly. You will need to find a payment plan that suits your budget while paying the debt in a reasonable amount of time. If you find yourself using it to pay for everyday purchases such as groceries and gas, it won’t take long to reach your maximum credit limit, and this could cause debt issues down the road.
4. Is there anything to be cautious about?
Payday loan establishments are offering a new line of credit product. It is promoted to help people rebuild their credit rating. These specific lines of credit have very high fees and interest rates associated with them. Although they will report to the credit reporting agencies, there are much better alternatives to rebuild your credit rating out there.
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