Tuesday, August 4, 2009

Why you need a line of credit

Every responsible financial planning expert stresses the value of minimizing the use of credit – and you know that, too. It’s why you stay away from high-interest credit cards and use credit wisely. So, why should you arrange a line of credit (LOC)? There are some good financial planning reasons to have a LOC available to you.

A LOC is an arrangement with a financial institution that allows you to borrow money up to a pre-determined limit. When you apply for a LOC, your lender will set your LOC limit based on your income, current level of debt, and your bill-paying and debt-repaying record.

The benefits of a LOC

Gives you better control over your finances because you are able to borrow whenever the need arises without having to apply for a loan every time you require financing.

  • There are usually no set-up, monthly or annual fees.
  • Make withdrawals at any time for any purpose, including emergencies.
  • Pay interest only on the amount of your withdrawals – this can be especially beneficial when money is required in stages, perhaps to fund a home renovation.
  • You choose when and how much to apply to a principal repayment – your only required monthly cost is a minimum payment to cover accrued interest.
  • A good tool for debt consolidation – use a low-interest LOC to payout higher interest credit cards or personal loan
  • A secured LOC – one that is guaranteed by an underlying asset such as the equity in your home – carries a significantly lower interest rate than an unsecured LOC but any LOC typically features interest rates that are lower than credit card, personal loan or short-term loan rates.
  • Can be paid off at any time without penalty.

The drawbacks of a LOC

  • Your interest rate could go up.
  • You could spend your entire LOC and be unable to pay it back. Limit your LOC to an amount you can afford.
  • You should establish a LOC when you have a stable income and good credit rating so that, in the event of a job loss or medical issue, your access to credit won’t be affected. LOC interest rates and other terms vary – so shop around for your LOC.
  • A LOC can be a low-cost, flexible credit option. Ask your professional advisor if a LOC makes sense as part of your overall financial plan.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.

John Scholl B. Mathematics, CGA, Picture (Device Independent Bitmap)

Wealth Management & Financial Planning

Investors Group

Tel.(905) 450-2891 X529 Toll Free: (866) 799-2223 Cell: (416) 731-3660

Email: john.scholl@investorsgroup.com

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