Line of Credit
This is the most popular credit instrument, and the fastest growing option at financial institutions
How it works
A line of credit can give you some protection in the event of an unexpected expense or a job loss, because once it has been authorized, it is very rarely revoked. However, don’t wait until you need a line of credit to ask for one, because it will be harder or impossible to get once your financial situation has worsened.
Usually, the interest rate on a line of credit is lower than on a personal loan and interest is only charged if you use it. It’s therefore very flexible.
But, because there is no obligation to pay back the borrowed capital, a line of credit requires a lot of discipline to make sure you don’t stay in debt for a long time!
If you own a home, your financial institution may offer to attach the line of credit to your property. This can be a good idea because the interest rate is closer to a mortgage rate, so much lower than a personal credit line and there’s more flexibility to make large purchases or expenses (ATV, RV, travel, renovations, etc.). Although it’s always good to have a lower interest rate, there’s a risk that your home will be used as an ATM to make large purchases that you would normally not buy.. Your goal should be to pay off your mortgage by the time you retire. Suc a line of credit should therefore be used with great caution.
Because a line of credit has a lower interest than a debt consolidation loan which varies between 12% and 14%, it should not be included in a debt consolidation loan because one of the main goals of a consolidation is to reduce the interest rate.
Therefore, your credit line should be part of a separate repayment plan. If your budget does not allow for consolidation loan payment or if you are not eligible for such a loan, a consumer proposal may be a good alternative. The consumer proposal allows you to lower your total debt, combine all your payments into a single payment, and eliminates interest charges. It also forces you to pay back the amount you and your creditors agreed on within 5 years. All plans should have a maximum time limit.
If you don’t have enough income to make a proposal to your creditors, a bankruptcy may be easier, cheaper and quicker than the other two options.
Please note that if your line of credit is tied to your home, it will affect your ability to include it into a debt repayment plan, a consumer proposal or a bankruptcy. Your Jean Fortin advisor can discuss this in more details at your meeting.
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