Line of Credit

A Line of Credit is type of revolving loan with preapproved credit limit, for a specified period of time. The line of credit gives the borrower flexible access to funds, whenever they need it. All major Canadian banks - RBC, TD Bank, BMO, Scotiabank and CIBC offer lines of credit to their customers. The funds available in the line of credit account can be withdrawn and used at any time during the life of the line of credit. The borrower can withdraw part or all available funds from his line of credit and they can also repay the funds back at any time. In some sense a line of credit is very similar to a credit card because as soon as you repay your balance in part or in full you can use the funds again. That's why the lines of credit are considered revolving credit. A line of credit can be unsecured or secured by an asset owned by the borrower. With most Canadian banks you can access the funds in your line of credit by writing a cheque, using your bank card, and via telephone or online banking . Usually the financial institution you have opened line of credit with, will require a minimum monthly payment, which vary depending on the bank and the amount you have borrowed. The borrower has to repay everything they have borrowed on the line of credit on the maturity date of the loan.

Types of Credit Lines

The most well known type of line of credit is the personal line of credit. Many Canadians have personal lines of credit usually with one of the big five Canadian banks. The money you have access to through your personal line of credit can be used for virtually anything – renovations, buying TV, paying for vacation, investing and even consolidating debt (you can draw funds from your line of credit to pay off credit card debt). The personal line of credit limits usually range from a few thousands to hundreds of thousands of dollars. Another type of credit line is the business line of credit, also known as operating line of credit. The business lines of credit are used by millions of small, medium and large business worldwide, to fund their day-to-day operations.

Line of Credit Example

John is a customer of BMO, who works in the automotive industry. John is well aware that his job might be at risk in the near future due to layoffs and he needs to have access to emergency funds in case he ends up unemployed for a few months. John goes to the nearest BMO banking branch and opens a line of credit, which allows him to borrow up to $10,000 CAD anytime. John can now sleep better knowing that if he's laid off, he can use the funds in his credit line to pay the bill until he finds a new job.

Line of Credit Benefits

One of the major benefits of credit lines is the fact that they have lower interest rate compared to most credit cards. Using a line of credit is very convenient and in effect is no different than using your bank checking account – you can write a cheque, use online banking, telephone banking, and access the funds with your bank card in most cases. Another great benefit is that you can be flexible repaying your loan. If you have the funds you can repay everything borrowed on the credit line at once without a penalty. All in one a line of credit is a great way to have access to funds whenever you need it.

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