January 18, 2007, 11:00 am

The Line of Credit

by: admin    Category: Types of Financial Products
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You are planning to renovate your kitchen but you don’t know how much it will cost and you don’t need the full amount right away as you want to purchase the material over a few months. The line of credit might be the financial product for your project.

Definition

A line of credit, also known as flex line, is an amount of money that is available anytime. There is no need to get the full amount on day 1 as you can access your account with a client card, cheques and even with internet. The limit granted by financial institution represents the maximum amount you can withdraw.

The rate on a line of credit is always variable. This rate is related to the prime rate. Rates can go from prime + 0 to prime + 7% and even more depending on your profile and the financial institution.

The payment for each month will also depend on the lender’s policy. Some request a minimum payment as small as the monthly interest and others ask for 3% of the balance. Other agreements can also be made depending on the situation but most institutions go with a percentage of the balance.

One of the major characteristic of this product is that the amount of money is revolving as long as the line of credit is opened. This means that you are allowed to withdraw money from the flex line after you made a lump sum payment. Most institutions will request that the line of credit fluctuate over time as it is not meant to be maxed out all the time.

Needs

When you apply for this product, the need for money is usually known, but the amount needed is not defined. Lines of credit are good for projects like renovation, wedding, starting a company or an overseas trip. It gives flexibility to the individual as he has the opportunity to withdraw according to his needs and the minimum payment is less than on a personal loan. As the line of credit grants more possibility in your financial planning, you must remain vigilant with its usage. Paying interest only months after months will result into high interest cost at the end of the year.

Qualification

For most banks, more flexibility means more risk for them. Therefore, it is harder to qualify for this type of loan. A minimum income and a well established credit history is required on a regular basis. If your income is too low, some institution will also take their decision based on your net worth. Most institutions will consider 10% of you net worth as the maximum amount for a flex line. Some special programs for students and new companies exist as well. Lenders will always request a low TDSR as well. If you don’t qualify, you might want to resubmit with a co-applicant or try to qualify for a personal loan.

Negotiation

As the rate is established according to your credit history and the amount requested, you might be able to negotiate this point. Having a good repayment history will also help you to review the minimum monthly payment. With a high net worth, you can also ask to revise the approved amount.

To resume this product, we might say that the line of credit is one the most financial product. It is harder to qualify for because the amount granted is revolving. Therefore, it requests a better financial planning.

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