Line of Credit: Protecting Yourself from a Financial Emergency

By on May 14, 2014 No Comments

Most people don’t get into debt on purpose; they get into debt because they run into financial difficulty. While some people are in debt because they aren’t able to get their spending under control, others are in debt because they run into a financial emergency, such as job loss, illness, or an unexpected major expense. While it’s typically recommended you should have an emergency fund – between three to six months’ living expenses earmarked for a rainy day – not everyone can afford that. The next best thing can be to set up a line of credit.

What is a Line of Credit?

A line of credit is ideal if you’re running into a temporary financial bind. For example, if your car breaks down and you need a new car right away to get to work, a line of credit can help bridge the gap. A line of credit is a temporary loan your bank will allow you to take to cover short-term financial shortfalls. Lenders typically provide them to people with good credit ratings and a decent annual salary. Generally, the higher your credit score, the higher your approval limit.

Similar to variable rate mortgages, the interest rates on lines of credit are based on the prime rate plus a spread. For example, today you can get a line of credit for as little as prime plus 50 basis points. The best part about a line of credit is that it’s there when you need it; you don’t pay any interest or an annual fee unless you use it. The minimum payment isn’t too burdensome; the minimum monthly payments are typically 3 per cent of your outstanding balance plus interest.

Using a Line of Credit Wisely

Similar to a credit card, a line of credit should be used for emergencies only. You can quickly find yourself in a debt trap if you use it to finance purchases you can’t afford today like a new big screen TV or stereo system. The best part about lines of credit is that they almost always come with a lower interest rate than credit cards.

If you’re carrying a balance on your credit card, a good way to save on interest is to pay off your outstanding balance with your line of credit; just be sure to develop a realistic repayment plan. If you’re saving up for a down payment for a house, using your line of credit is a bad idea; it will hurt your borrowing ratio and you’ll end up qualifying for a lower mortgage amount.

Secured vs. Unsecured Lines of Credit

There are two main types of lines of credit. As the name suggests, unsecured lines of credit aren’t backed by any asset, so not surprisingly they carry the highest rate of interest. Meanwhile, secured lines of credits are backed by a valuable asset like your family home or investments. It’s almost always better to go with a secured line of credit when possible, as you can end up saving a lot on interest.


Top Tips for First Time Home Buyers

By Rubina Ahmed-Haq on April 26, 2017

This is the busiest time for real estate transactions in Canada. If you’re out shopping for a home it’s easy to get caught up and spend more than you wanted too. For first time homebuyers it can be an overwhelming experience. Before setting out to buy your first home here are a few ways you…

How Diversifying Your Transportation Habits Can Save You Thousands

By Jordann Brown on April 17, 2017

If you grew up with two cars in your parents’ driveway, you’re not alone. Like most Canadians, the generation before us spent thousands of dollars per year maintaining their vehicles, fueling them up and paying for them through car loans. For our parents, cars were a sign of freedom, mobility, and independence. Fast forward 20…

How to Budget For Summer Holidays

By Alyssa Davies on March 29, 2017

I know what you’re thinking – summer seems way too far away to be worrying about what lies ahead. However, that is exactly why you need to start planning and prepping for any upcoming expenses. Not unlike Christmastime, summer travel and events can end up being just as costly. Wedding season rolls around, camping trips…

Which Type of Debt Should You Repay First?

By Amanda Reaume on March 23, 2017

Some people feel very anxious when they’re in debt and want to pay it off as soon as possible. But if you have a lot of debt or if you have many different types of debt, then you might be confused as to which debt you should pay off first. The first thing that you…

No Comments Leave a Comment  

Leave a Comment

Free Savings Estimate

How much do you owe?


Live Chat
Welcome to our Live Chat
Agents are not available at this time. Please leave a message. Thank you.
First Name
Last Name
Postal Code
Debt Amount
PHP Live! powered