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Personal Line of Credit

When you’re in a sticky financial situation and need some relief, your first instinct may be to reach for your emergency savings fund. But what do you do if you’re short on savings and need to get out of a financial bind?

In situations like these, a personal line of credit can be the safety net you need to help you deal with an emergency expense. But before you consider applying for one, it’s important to have a full understanding of what a line of credit is. How does a line of credit work? How do you apply for one? And what are the benefits of a line of credit? We’ll go over all this and more in this introduction into the world of lines of credit!

What is a Line of Credit?

If you use a credit card regularly, or at least know how they work, a lot of the details of what a line of credit is and how it works are probably going to be familiar to you. Similar to a credit card, a line of credit is a type of revolving credit that you can generally utilize as long as you have available credit.

While there are lines of credit that exist for businesses to use for any number of business needs, our main focus here is on personal lines of credit. As you might guess, these are intended for personal use only, which could include a wide range of uses.

If your application for a revolving line of credit is approved, your exact credit limit is going to be determined by a number of different factors that make up your financial profile. A credit limit is the total amount of credit that is available to you. As you draw funds against your credit limit, your available credit will change. However, as you pay down what you owe, your available credit will generally replenish and you can continue to access funds without having to apply for a whole new line of credit.

How to Apply for a Line of Credit in Canada

If you’re facing an emergency expense and you need some financial backup, a personal line of credit can be a great safety net to tap into in times of need. The application process is generally similar to what it would be if you were to apply for any number of other personal loans in Canada. You can apply through institutions like banks, independent lenders, credit unions, or online lenders. You may be able to apply online or in person, depending on the institution.

3 Important Things to do When you Want to Apply for a Line of Credit

If you’ve decided that a personal line of credit is right for you and you’ve identified lenders that you’d like to apply for a loan with, it helps to get yourself organized ahead of time. Here are some things you can do to prepare for the application process.

1. Take a Look at the State of your Credit

Keeping tabs on where your credit score stands is a good habit. It is a good time to check in with the state of your credit before applying for a personal line of credit. Your credit score can play a big role in your ability to get approved for credit of any kind; you can check your credit score through credit reporting agencies, such as, Equifax and TransUnion.

You can also get a free copy of your credit report from both Equifax and TransUnion. This will give you a detailed history of your borrowing activity and any other activity that may have impacted your credit score. Checking your credit report periodically is an important habit to get into so that you can spot any errors that may be having a negative impact on your credit score. If you do find errors, you can take the required steps to get these negative marks removed.

2. Get your Personal Documentation in Order

Whenever you apply for a line of credit loan, you’ll need to provide certain pieces of personal information as part of the application process. The specifics can vary between lenders, but you’ll generally need to provide things like proof of income, your province or territory of residence, and more. Try to have some of the documentation on hand before you start the application process.

3. Do Some Research Into your Potential Borrowing Options

No matter what your situation, applying for credit can have a big impact on your financial standing, so it’s important that you don’t take this decision lightly. Before you submit an application, it’s important that you take the time to scan the field, learn as much as you can about the potential options, and find something that suits your financial situation. Consider questions like:

  • What is the cost of borrowing?
  • Will I be charged interest or fees for the line of credit, and if so, what are they?
  • What kind of reputation does the lender have?
  • Will the credit limit be enough for my needs?

By being thorough in your research, you’ll put yourself in a good position to make a choice that’s suited to your needs.

Line of Credit Requirements

No two lenders are identical, and this extends to the requirements that you’ll need to meet in order to qualify for a line of credit. With that said, there may be some consistency in eligibility requirements across the board.

For starters, many lenders will look at your credit score evaluate your creditworthiness, including what type of borrower you’ve been in the past. On top of that, they’ll likely look at your income, your employment situation, and more.

Potential Benefits of an Online Line of Credit

Like we mentioned earlier, when you’re looking to apply for a personal line of credit, you can apply at a physical location, or you can look for an online line of credit. With an online line of credit, you will generally go through all, if not most, of the application process online.

Let’s take a look at some other benefits of online loans.


1. Fast Application Process

If you’re facing an emergency expense, you’ll probably want to get it off your plate as soon as possible, right? Well, a fast line of credit application process can go a long way in helping you get the money you need quickly.

If you go a more conventional route and apply for a loan at a physical location, the entire process of applying might take a little more time than you’d like. The first thing you’ll need to work out is how you’re going to find time to travel to a physical location. If your schedule is fairly light and you live close to one, this may not be an issue for you. On the other hand, if you’ve got to find time between work, kids, or whatever other daily responsibilities you may have, this can be challenging.

If you do manage to find time to go to a physical location, you may need to wait to speak to an associate, if you don’t have an appointment. When it comes to online loans, the virtual nature of the application process makes it easier to fit into your schedule. All you’ll need to do to get started is to find a few minutes in your day to go online and fill out an application. It’s generally as simple as that!


2. Convenience

Speaking of simple, there’s more to online loans than the fast nature of the application process. Convenience is another hallmark of these types of personal loans. Assuming you have internet access, you can apply from wherever is most convenient for you, whether it is from the comfort of your home, or on the go. Also, if your days are so packed that you don’t think you can spare even a few minutes in the morning or afternoon, in a lot of cases, you can apply for online loans 24/7.


3. Easy Access to Important Loan Information

When we talk about applying for a personal line of credit, we can’t leave out the importance of the research portion of the process. Before you decide which lines of credit you might want to apply for, you’ll want to make sure you’ve done ample research to back up your decision. When it comes to researching online loans, this process is simple. Lenders that offer online loans should have the information you need easily accessible on their website. So, all you need to do is a quick search for an online line of credit or loan offered in your province, go over the options that come up, and compare what’s out there.


4. Quick Funding

The fast nature of the application process of an online line of credit can make them a good option if you need some financial help. With some lenders, not only is the application process fast, but you may also be able to get funded quickly, if approved. This will depend on the individual lender as well as your bank’s policies.

How to Use a Line of Credit

Like we’ve touched on, a personal line of credit is a helpful way to get access to funds when you need them in an emergency situation. This could be for things like unexpected home repairs, emergency auto repairs, and more. But, while it’s important to understand when it might be appropriate to apply for a line of credit, it’s also vital to understand when you shouldn’t consider using one. For example, you wouldn’t want to apply for a loan for things like:

  • Vacation expenses
  • Long-term savings plans
  • Discretionary shopping trips

Also, you should only apply for a line of credit online in an emergency situation, if you know you can pay back what you’ve borrowed.

What is a Secured vs. Unsecured Line of Credit?

If you’re trying to get a better understanding of what a line of credit is, an important distinction to understand is the difference between a secured and unsecured line of credit.

With a secured line of credit, you’ll need to provide collateral in order to qualify. This will be some type of valuable asset that a lender can seize if you default on your line of credit. Generally speaking, these loans tend to have relatively low rates since the collateral acts as security for the loan.

With an unsecured line of credit, you won’t need to provide collateral. However, this means that rates may be higher than they typically are with secured loans.

What is a Bad Credit Line of Credit?

When it comes to getting approved for a fast line of credit, meaning, a line of credit with a fast application process, your credit score can often play a big role. When you submit an application, in some cases, a lender may look at your credit score to determine how reliable of a borrower you’ve been in the past. So, if you don’t have the best credit, it could make things a little tougher for you.

Having said that, if you’re looking for a loan with bad credit, you may be in luck. Some lenders offer a bad credit line of credit that’s specifically meant for people who don’t have the best credit history. Instead of placing a lot of their focus on your credit score, they’ll likely put more stock in things like your income and employment situation. Just keep in mind that bad credit loans tend to come with high interest rates and/or fees, so treat them as a last resort and never apply for a loan that you can’t afford to repay.

What are the Differences Between Lines of Credit and Installment Loans?

One way to get a better understanding of how a line of credit works is to compare it to another common type of personal loan – an installment loan. While both can be useful when you’re facing an emergency expense, they have different characteristics that may make one better suited to you over the other, depending on your situation.

One important aspect that we outlined previously is the flexible nature of a personal line of credit. Like we mentioned, when you’re utilizing your line of credit, you’ll be able to decide how much money you’d like to draw from your available credit. Because of this, you have some autonomy in deciding how much of your line of credit you’ll use, and when you’ll use it. This works differently than an installment loan, where, if approved, you’ll be given the amount you’ve been approved for in a lump sum.

Another important difference between a line of credit and an installment is that a line of credit does not have a set loan term, while an installment loan does. This means that with an installment loan, there is a set number of scheduled payments, to be repaid over time. With a line of credit, because you can draw, repay, and redraw funds, there is no fixed loan term.

Furthermore, with a line of credit, interest/fees will generally only begin to accrue once you draw funds, and the amount you’ll be charged will be based on the amount of funds you have outstanding, not your entire credit limit. Whereas, with an installment loan, because funds are extended in a lump sum, interest/fees begin to accrue right away.

When you’re faced with an emergency expense, lines of credit may be a convenient and flexible way to get the funds you need. However, before you consider applying for one, make sure to do your research and ensure that it is something you can afford.