The Functions of Line of Credit in Canada:

by | Jul 8, 2022

If saving for the future is your passion, you’ll want to read on. Your chances of achieving your goals are increased the earlier you start planning and investing. When making future plans, there are several factors to take into account. Would you like a car? A residence? How about children? Let’s think about these things in ten years. A line of credit can get you the credit you need to make some serious purchases. But before you do that, you need to comprehend how a line of credit functions. This will eliminate surprises and ensure that your finances aren’t in knots later on.

Talk to us about setting up a lifelong plan for your dreams. As, we are here with our team at Yogi & Associates, a financial services and investment firm located in Mississauga, Ontario. We’re ready and willing to provide you with personalized service and advice on how to make your dreams come true. Talk to us today about setting up a lifetime plan for yours!

Let’s take a look at the functions of the line of credit. This article will explain what it is, how it works, and when you might consider using one or more of them.

Functions of Line of Credits:

The functions of Line of Credits are:

  1. Secured Line of Credits
  2. Un-secured Line of Credits

1. Secured Line of Credits:

The first function of the line of credit is a Secured Line of Credit. A secured line of credit is a great way to access funds you may need in the future. You use your home or other valuable assets as collateral, which acts as security for the loan. The lender can feel confident that even if you default on your payments, they will get their money back from your assets because it’s your property. Because of this reduced risk to lenders, there is usually more than an average interest rate on these loans. This may be a good option if you’re planning on buying a house or investing in property here in Mississauga. It’s typically priced below credit cards, but the interest rate may be higher than a credit card would offer.

functions of line of credit
  • Home Equity Line Of Credit (HELOC)

A home equity line of credit (HELOC) is a loan secured by your home, providing you with funds to build or improve your property during its term. HELOCs are designed to help with everyday expenses and are an excellent way to get the money you need without missing out on big-ticket purchases. This secured debt has a higher credit limit than other lines of credit and loans but comes with lower interest rates than unsecured debt.

Uses of HELOC:

If you have a home equity line of credit, it can be used for virtually anything. The flexibility of this loan product means that you’ll have a lot of options for using it; whether it’s for everyday expenses like groceries and gas, or else for big-ticket items like college. You can use your HELOC in some of the followings:

  • Managing your debt
  • Tuition expenses
  • Investment in start-up businesses.
  • Educational expenses
  • Setting your family’s future

How to Apply for HELOC?

If you want to apply for a Home Equity Line of Credit, you’ll usually need to submit the following documents:

  • Identity documentation
  • Proof of homeownership
  • Your home’s current value
  • Your mortgage documents.

2. Unsecured Line of Credits:

Another line of credit is an unsecured line of credit. An unsecured line of credit is not secured by a mortgage or other asset. This means that it doesn’t need collateral to secure the loan amount, so you don’t have to meet the Lender’s requirements for return when you want to make your payments.  An unsecured line of credit allows borrowers to build a good credit history before receiving any interest-paying funds. The unsecured line of credit is a personal line of credit and a student line of credit.

  • Personal Line Of Credit:

Personal lines of credit are a great way to budget and save money at the same time. These unsecured loans give you a specific credit line that you can use for future expenses, including major purchases or emergencies. Personal Lines of Credit can help you manage unexpected expenses, such as car repairs or emergency travel costs.

Why Should You Get a Personal Line Of Credit?

Are you planning to buy a new house or invest in a business? Do you need to borrow money when the bills are piling up? A personal line of credit could be just what you need. With low-interest rates and a flexible repayment schedule, a personal line of credit is a smart and easy way to get access to money where and when you need it. With a personal credit line, you can borrow what you want, when you want, within a pre-approved limit, and you only pay interest on what you borrow.

How Does Personal Line of Credit Work?

Personal lines of credit are a great way to borrow money when you need it and have good credit. The process is fairly straightforward: You apply for a personal line of credit, and your lender determines if you qualify and grants you access to the funds, which you can use as you see fit – usually on purchases or home renovations. You can use a personal line of credit in various situations:

  1. Home improvements
  2. Massive expenditures (such as a vehicle or property)
  3. Important life activities (such as weddings or funerals)
  4. Taking a trip
  5. Unplanned expenditure (such as health emergencies or family member needs)
  6. Realigning debt
  7. Increasing monthly income (for self-employed people or people with irregular earnings)

How to Apply For a Personal Line Of Credit?

A personal line of credit gives you access to money when you need it. It’s a popular tool for Canadians to manage their monthly spending, as it offers more flexibility than a mortgage or loan and often at a lower interest rate. You’ll also easily be able to find out about Canadian banks that offer lines of credit for Canadians, through most Canadian banks offer them. To apply for yours, you may be asked to submit the following:

  • You’ll need your photo ID, like your passport or driver’s license.
  • They’ll want to know how much money you make and where it comes from (like your paychecks or tax returns)
  • You also need to show documentation on any debt you already have (like your mortgage).
  • If you’re getting a secured line of credit, you also need to prove how much stuff you own.
functions of line of credit
  • Student Lines Of Credit:

If you’re planning to pursue further education in Canada, a student line of credit can help you get the money you need. With a line of credit, you won’t have to pay interest on the entire amount, but will only be charged interest on what you borrow and use. You can start repaying your line of credit as soon as your studies are complete.

How Does Student Line of Credit Work?

The student line of credit allows you to borrow money from an institution that’s offering the product. Just like a loan, it will go toward meeting your payments for tuition, books, or other school-related expenses. With it, you only have to pay back the money you borrow. You also pay no interest until your line of credit is closed. Certain rules apply when using student lines of credit. If you’re planning on attending university or college, getting a student line of credit is a great way to pay for tuition and textbooks. It can also be used as an emergency fund or to cover everyday expenses.

Insurance on Student Line of Credit:

You may be able to get loan insurance on your student line of credit if you want additional protection from unexpected financial hardship. Some lenders offer this type of credit and loan insurance as an optional feature, while others require you to decide whether you want the coverage. If your lender offers optional coverage, it’s important to read the fine print before signing up.

  • Accessing Money for Student Line Of Credit:
  • Accessing money from your student line of credit is relatively simple. you can get access once:
  • You’ve signed the papers
  • Your application is approved
  • You’re ready for your funds

Paying Back Your Student Line Of Credit:

While you’re at school you must pay the interest but can defer repaying the principal. Once you finish school, you have a grace period (usually 6 to 12 months) where you continue to pay only the interest on your line of credit. After that period ends, you’ll start to repay the principal and interest.

How to Apply For Student Line Of Credit?

To apply for a student line of credit, you’ll need to provide the financial institution with the following:

  • Proof of identity
  • Proof of enrolment in a Canadian post-secondary institution
  • Proof that you are using the loan to attend school (education cost estimate)
  • Proof of funding for your education.

If you want to learn more about the Line of Credit, you can look into our article by clicking The Basics of Line of Credit.

Functions of line of credit

Pros and Cons of Line of  Credit:

Pros/Cons Pros Cons
Interest Rates The primary benefit of using a line of credit is that interest rates are kept low, allowing you to enjoy greater financial stability. Interest rates fluctuate and can change as they relate to your ability to make payments.
Repayment You don’t need to be disciplined to pay back the money you borrow since there is no set repayment timetable or grace period. If you miss payments on your line of credit, that same bank or lender could lower your credit limit or require repayment at any time with notice.
Rules of Bank If your bank allows you to shift any overdrafts on your regular account to your line of credit, you could save money on bank fees. Your bank or other lender has the right to reduce your credit limit or request that you return the loan immediately (with notice)

The Bottom Line!

If you’re not taking advantage of the lines of credit that are available, then there’s no point in having them. When it comes to making sizable purchases such as a home, car, or other durable goods, many people prefer cash transactions. They believe it is easier and less expensive in the end because they don’t have to pay interest charges on top of their principal payments. I hear this all the time from clients who have never had a credit line before: “It doesn’t make sense to take on debt when I can just buy everything outright.” It’s understandable why this first instinct would be to pay for things off the top without incurring extra costs at all, but let’s face facts – interest rates have been going up over time.

If you’re still unclear about your options and wondering what the best thing to do is, come talk with us at Yogi & Associates in Mississauga. We’re happy to help you out and discuss all of your options with you. We’ll be able to assess whether or not a line of credit would be right for you and will make sure that everything is transparent and complete so that there are no surprises once it comes time to make the decision.