Line of credit debts

What is a line of credit?

A line of credit is a flexible loan offered by a financial institution that allows you to borrow money up to a predetermined limit. You have the freedom to use it as you wish, without having to fund a specific project. You can withdraw only the amount you need or use the full available funds, depending on your needs. If your balance is zero, it doesn’t cost you a penny. Since financial institutions are more willing to extend credit when your finances are in good shape, it may be wise to apply for one (even if you don’t use it) as a safeguard against unexpected events (job loss, emergency repairs, etc.).

A line of credit can be either secured or unsecured. We explain the differences below.

Secured line of credit

If you own your home, the financial institution may offer to attach your line of credit to your mortgage. This is then a secured line of credit, meaning the lender can seize your asset in the event of default.

The advantage of a secured line of credit is that the interest rate is similar to that of a mortgage loan—significantly lower and offering more flexibility for large purchases or expenses (ATVs, RVs, travel, renovations, etc.).

However, the downside of a low interest rate combined with no obligation to repay the principal is that your home may become an ATM for consumer spending. Keep in mind that while the line of credit doesn’t require principal repayment, the goal is to retire with a fully paid-off home. Therefore, you should have a principal repayment plan. A home equity line of credit should be used with great caution.

Unsecured line of credit

An unsecured line of credit, such as a personal line of credit, is not tied to any asset. Unlike a home equity line of credit, the unsecured version comes with a higher interest rate since it presents more risk to the lender. Additionally, the amount granted is usually lower than that of a secured line of credit.

I have a line of credit, how should I go about repaying it?

Since a line of credit typically offers a lower interest rate than a debt consolidation loan (which ranges from 12% to 14%), it should not be included in a debt consolidation plan. One of the main goals of consolidation is to reduce interest charges. Therefore, your line of credit should be repaid through a separate plan.

What are my options if I can’t repay my line of credit?

If your income is insufficient to create a repayment plan for your line of credit, a consumer proposal could be an appealing alternative. It allows you to:

• reduce your total debt
• consolidate all your payments into one
• eliminate interest charges
• and requires you to repay the agreed amount to your creditors over 5 years.

We invite you to learn more about the benefits of a consumer proposal.

If your income is too low to make a proposal to your creditors, bankruptcy may be a simple, low-cost, and quicker solution. We invite you to read our article “When to file for bankruptcy?”

Note if your line of credit is tied to your home, it may affect whether it can be included in a debt repayment plan, a proposal, or a bankruptcy. Your advisor at Jean Fortin can discuss this with you during your free consultation.

The sooner you know your rights, obligations, and available solutions, the less stress you’ll experience and the better your chances of overcoming financial difficulties.