What is a line of credit?
When you need to borrow money, a line of credit can be an option. Learn about the different types in Canada.
Why are mortgages so expensive in Canada?
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A line of credit (LOC) is a revolving loan with a predetermined maximum and interest rate set by the lender. You pay interest only on what you borrow. You can use the money for anything you like, and you can pay it back and borrow again anytime. LOCs have two types: secured and unsecured. Secured LOCs require an asset as collateral—for example, your home or car. If you default on your interest payments, the lender will take possession of the asset. Unsecured LOCs aren’t tied to assets, so they tend to charge higher interest rates to compensate for the lender’s added risk.
How do lenders set the interest rate on a line of credit?
When you borrow money using a line of credit, you pay interest to the lender. Typically, the interest rate is variable, meaning it rises and falls based on the lender’s prime rate. The prime rate is influenced by the Bank of Canada’s policy interest rate (also called the benchmark interest rate). A line-of-credit interest rate is the prime rate plus or minus a percentage—for example, “prime plus 1%.” The policy interest rate is currently 3.75%.
Example: “Vince took out a home equity line of credit to pay for his basement renovation.”
Read more on lines of credit:
- Credit during COVID-19: accessing the best credit in Canada right now
Living paycheque to paycheque used to be manageable. But with the coronavirus pandemic, money is tighter than ever. Here’s what you can do to get credit during COVID-19. - Using a HELOC as an investment strategy: not as taboo as you might think
Should Martha leverage the equity in her home to invest in dividend-paying investments—and what are the tax repercussions? - Reverse mortgage vs HELOC: Deciding the best way to access the equity in your home
If you don’t have income, or suddenly face a job loss or emergency expense, it may be difficult to get approved for a home equity line of credit, and selling may not net you as much money as you would like. - Does it make sense to use a line of credit to pay off credit card debt?
How to deal with outstanding credit card balances? A line of credit is one way to take care of that high-interest debt, but it’s not a one-size-fits-all solution. - Could a line of credit impact my mortgage application?
Line of credit payments and other non-mortgage debt are factored into mortgage affordability calculations. Here’s what you need to know before filing your mortgage application. - How to use equity to buy a second home
We look at four common ways of financing the purchase of a second property using equity built up in your current home.
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