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,
Wealth Management & Financial Planning
Tel.(905) 450-2891 X529 Toll Free: (866) 799-2223 Cell: (416) 731-3660