When to Utilize a Line of Credit

June 2, 2016

There are times in life when you need an extra boost. Pam and Aubrey want to get ahead on their debt as they are expecting their first child. Claire and Marshall wake up one day to discover that the pipes in their bathroom needed a major overhaul. Self-employed Vera and Isaac want to jumpstart their investments during a slump in Vera’s income.

All these people were able to achieve what they set out to do by using a line of credit. Different from a loan or a credit card, a line of credit (LOC) has a place for almost all Canadians.  

What it is

While a typical personal loan provides a set amount of cash, a LOC acts more like a credit card, allowing you to access the funds only when they are needed. A LOC typically has a lower interest rate and a higher limit than a credit card.

There are a number of different kinds of LOCs, but they typically fall within two categories:

• Secured —The money you take out is backed by collateral (e.g., your house, vehicle, or other asset). These are safer for the lender, so they usually have higher limits and lower interest rates.

• Unsecured — This LOC is not backed by collateral. It can be harder to attain and have a higher interest rate, because of its greater risk for lenders.

When to use it

As with all loans, it’s important to think carefully when taking out an LOC. A debt-dependent lifestyle can hinder your financial and personal growth. But when used conscientiously, they are a valuable tool to have in your financial arsenal.

Some examples of how a LOC could be used:

• Debt consolidation: Pam and Aubrey have a lot on their plates with their first child on the way. Using a line of credit will consolidate their debts, lower their interest rates, and provide them with more financial flexibility. To manage their debt, they will keep on top of payments and not overestimate the LOC’s flexibility.  

• Unexpected expenses: Claire and Marshall can purchase a home equity line of credit (HELOC) to get the funds they need to redo their busted pipes. As with Pam and Aubrey, they will be rigid about their repayments. A HELOC means they do not have to dent their long-term savings in an emergency.

• Temporary income: Vera does not have a steady income stream. Rather than relying on credit cards to get her through the slump, she can take out money from a LOC at a much lower interest rate.

• Leverage to invest: While interest on most debt is not tax deductible, you can deduct interest payments on your line of credit if the money has been used to make investments. This is especially beneficial if an employer requires you to invest in company shares or you need to cover deductible expenses on your own business.

A line of credit can be a lifesaver, but it can’t fix every problem. The flexibility and low interest rate of a line of credit can provide the financial boost needed in a variety of situations, but developing a repayment plan is essential.
When faced with difficult financial decisions, the best strategy is always to weigh your options, and get professional advice.  Discuss your options with SafeBridge today.