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)?
An LOC is an arrangement with a financial institution that allows borrowing up to a pre-determined limit. When applying, lenders will set limits based on income, debt level, and bill-paying/debt-repaying record.
The benefits of an LOC
•Gives better control over finances because you can 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 any time.
•Pay interest only on the amount of withdrawals.
•You choose when and how much to apply to a principal repayment.
•A tool for debt consolidation.
•A secured LOC carries a significantly lower interest rate than an unsecured LOC.
•Can be paid off any time without penalty.
The drawbacks of an LOC
•Your interest rate can go up.
•You could spend your entire LOC and be unable to pay it back.
•Establish with 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.
An LOC can be a low-cost, flexible credit option. Ask your professional adviser if an LOC makes sense as part of your overall financial plan.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.