Every now and then, people need a little bit of boost to their bank account. This could be for a number of reasons, whether you are having trouble paying your bills or need some extra money to make a big purchase. Oftentimes, people will opt for a traditional loan, and while that is a great way to secure some extra cash, it’s not the only way.
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If you want another option that is a little bit more flexible and can often be more affordable for most people in the long run, why not try a line of credit? This article will take a look at how to get the best rate for a line of credit, the different types of lines of credit, and more. But before diving into all of that important information, let’s look a little closer at what a line of credit actually is.
What is a Line of Credit?
While a line of credit is a form of a loan, it is different from the idea of a traditional loan where the entire amount is given to you at once and then you must pay it back in. A line of credit is essentially an agreement between you and a lender. This agreement will establish a specific balance that you, the customer, will be able to pull from and use as needed. You can use the money at any time and for any reason, so long as you do not go over the limit.
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So let’s say you and a bank agree to a $10,000 line of credit. You will be able to pull as little or as much from that whenever you want, as long as it is within the guidelines agreed upon by both parties. Of course, you will still need to make timely payments based on your particular agreement with the institution.
Advantages of a Line of Credit
The main advantages of a line of credit over a traditional loan are their flexibility and the fact you only pay interest on the money you borrow and spend, not on the entire line of credit. It is flexible because you can essentially only take out what you need and don’t need to be stuck with a massive loan you need to repay. And add to that the fact that you only have to pay back what you spend and not the entire thing, and you have a real winner for people who want more flexibility than a traditional loan will give you.
A line of credit is a perfect example of what’s called a revolving account. Basically, the money can be spent and repaid on an almost endless cycle. This differs from traditional loans which are repaid in equal monthly instalments vs. simply repaying whatever you use.
Want to know the difference between revolving credit and a traditional loan? Look here.
What Are Some Reasons to Use a Line of Credit?
Just like there are many different reasons to use a traditional loan, there are a number of different reasons a person might want to use a line of credit. One of the most common reasons is just to have a little more peace of mind and reassurance that you have access to a set amount of money in case any emergencies pop up.
In addition to that, you can use it as an alternative to a car loan, to purchase furniture or anything else you might need. However, most financial institutions won’t approve a line of credit that’s enough to afford a home/mortgage, so you might need to stick with a traditional loan. Basically, there is an endless number of reasons why you might need or want to use a line of credit, as it is essentially an easy and instant way to get money into your bank account quickly.
What Are the Different Types of Lines of Credit?
There are two main kinds of lines of credit, unsecured and secured. An unsecured line of credit does not require any collateral or security and a secured line of credit does, often your home, car, or business.
Click here to learn the difference between a line of credit and a credit card.
How to Get The Best Rate for a Line of Credit in Canada?
So now that you know about the different types of lines of credit and what they can be used for, let’s learn a bit more about how to get the best rate for a line of credit in Canada. The first thing you should do is get your credit in check and have a good credit report. These companies want to loan money to individuals with the highest chance to pay it back, so if your credit history is fantastic, they will be more willing to give you a better rate than if you hardly ever pay back your loans on time.
Improve Your Credit
This means that if your credit report isn’t great, you might want to take some time to pay off any outstanding debts and make timely payments in order to ensure your credit score is higher so that you are an ideal client. Of course, there are plenty of LOC options for those with less-than-stellar credit reports, but the interest rates might not be as attractive as they could have been. After a few months of working on your credit, there is a good chance you will be able to secure a better interest rate.
Read this to learn more ways of increasing your credit score immediately.
Choose a New Financial Institution
Also, if you are in the market to move to a new bank altogether, you should let them know. Banks are all about making money, so if you bring them more business in the form of your accounts and investments as well as a line of credit, they might be willing to give you a lower interest rate to try “warm you up” to the idea of bringing all of your banking to their institution.
Want to know how you can get a bank account in Canada for cheap or free? Look here.
Shop Around
Lastly, doing your research and shopping around for the best interest rate is often a good idea as well. Not every financial institution is going to give you the same rate, so take some time to speak to numerous different lenders and see who can provide you with the best interest rate.
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Borrow Only What You Can Afford
A line of credit is helpful in a number of different ways and is great for peace of mind, as you will always have some money to borrow if you need it. Hopefully, this article taught you all you need to know about lines of credit and showed you how to go out and get the best rate you possibly can. Of course, as with any type of loan or borrowing, you should ensure that you only borrow what you can afford to pay back. Getting stuck in an endless debt-cycle is not a good time and if you are going to borrow, make sure that you are able to afford the payments you have to make.
