What can you buy with a line of credit?

From car payments and groceries to school tuition, everyday spending and unexpected expenses, there are numerous reasons why you may need to borrow money in this lifetime. While you have the option of personal loans and virtual credit cards with overdraft protection coverage, a lot of Canadians opt for lines of credit.

So, what is a line of credit, and what exactly can you buy with this type of loan? Stick around to find more insights below.

What is a line of credit, and what can you use it for?

A line of credit is a type of loan you can get from a bank or credit union. With this, you're able to access money at your convenience rather than receiving your entire loan in one lump sum payment. As you borrow money from your credit line, you pay interest only on the borrowed funds rather than your credit limit.

Different types of credit products are available, including the following:

Personal line of credit

A personal line of credit is sort of like your own personal credit card. When you apply for personal lines, the financial institution will run a credit report and take a look at other factors before determining how much your credit limit is. Once this personal line of credit has been established, you can then transfer money directly into your chequing account and draw money as you need it out of an automated teller machine (ATM).

Most lines of credit have a variable interest rate, which means your interest rate can fluctuate from month to month. However, you can make a minimum monthly payment if needed during the months that you're tight on cash.

With a personal line of credit, you can make numerous purchases including, but not limited to, the following:

• Any type of emergency expenses like damage to your home, vehicle, vet bills, and other major expenses.

• Kitchen and bathroom renovations or other long-term projects that require funding.

• When you're in financial trouble or want to go on vacation.

• Debt consolidation.

Home equity line of credit (HELOC)

A home equity line of credit is a type of loan that is secured by the equity you already have in your property. Essentially, home equity lines allow homeowners to borrow money against their home by giving them access to money that has already been repaid on their principal mortgage. Home equity lines, again, have a variable interest rate, which means your monthly statement may change as interest rates rise and fall.

Using a home equity line of credit will allow you to make the following purchases if needed:

• You want to renovate your home.

• Launch a new business idea.

• Pay for someone to get their post-secondary education.

• Debt consolidation.

• Take out vehicle loans for your new ride.

Business line of credit

Next, you've got a business line of credit. Business lines work very similarly to a personal line of credit, where you only pay interest on the money you borrow rather than the entire available credit limit you've been approved for. The credit limit offered will be based on the credit history of the business owner and can be used to pay for inventory, have a business cash flow, and other expenses related to starting and running a business in Canada.

Student line of credit

A student line of credit is specifically designed for students attending a post-secondary institution. With this line of credit, students are able to pay for their tuition, textbooks and materials, housing, food costs, and other fees. Similar to other credit types we've talked about, the monthly interest can fluctuate on this credit line.

However, students will only need to make a minimum payment each month, which will be the interest payments on the money they've borrowed. Following graduation, students are typically given a grace period of 12 months before they will be required to pay the interest and principal back.

Can I buy a house with a line of credit?

Because home lines exist, you may be wondering, "Can I buy a house with a line of credit?" Buying a home in Canada is a dream that many of us have. But, with rising interest rates and daily expenses, saving and getting a mortgage is becoming more unattainable.

However, using a home equity line for a down payment on a new home has become a strategy that many Canadians are turning to. And believe it or not, using this line of credit method could present you with several advantages. From a lower interest rate to tax advantages and more purchasing power, the list keeps going.

But there's a catch. Before you can qualify for this line of credit, you'll first need to have equity in another home before applying, among other eligibility requirements. Additionally, borrowing funds for the down payment on a property can also put a strain on your personal finances and impact your credit score. So, before going down this route, make sure you weigh the pros and cons and look at alternative home-buying options before making a decision.

In the meantime, get a free credit score check and build your credit with KOHO!

Can I withdraw cash from my personal line of credit?

Yes, one of the many benefits personal lines of credit offer is the ability to withdraw money directly from your credit line from an ATM whenever you want. Depending on your financial institution, you may have the ability to write cheques at your convenience as well.

How does a lender determine your credit limit?

When applying for a line of credit, a financial institution and credit unions will ask you a series of questions before approving your application. Beyond asking you to confirm your identity, they'll also take a look at your finances and consider the following:

• Your current income.

• Whether you have any debt and how much debt you currently have.

• The results of your credit report and credit scores.

How is interest calculated on a line of credit?

So, how is interest calculated on a line of credit? While each lender may use a slightly different method, most calculate interest by dividing the annual interest rate by 365 to get what is known as a daily rate. With this, your bank or credit union will apply the daily rate to the amount you borrowed. Then, at the end of the month, when you receive your statement in the mail, they'll add up the daily interest charges.

Secured line vs. unsecured lines of credit

When looking for a line of credit, you'll typically be presented with two options: a secured line and an unsecured line. Now, you're probably thinking, "Secured vs unsecured line of credit, what's the difference?

Secured line

A secured line of credit requires collateral from the borrower in order to secure the loan. Collateral could be anything from your vehicle to your home or any other high-value asset you own. Essentially, this collateral serves as a guarantee to your lender that should you fail to repay your loan; they can seize your assets to cover the funds.

Unsecured line

In contrast, an unsecured line of credit does not require collateral from the borrower. Instead, the financial institution will do a credit check look at your finances and other factors before determining whether you'll be approved or not for the loan. This is where having a good credit history can come in handy, as the lender relies solely on the promise you make to repay the loan.

So, which one is better? While an unsecured line can yield a faster application process, they tend to have a higher interest rate compared to unsecured loans. On the flip side, secured lines of credit offer higher credit limits but come at the risk of losing your assets in the event you are unable to pay back your loan.

What is the difference between a credit line and a personal loan?

What about a personal loan vs line of credit? Check out the differences between the two below:

Credit line

As you know, a line of credit is a type of loan that allows you to borrow funds when you need up to your credit limit. Rather than paying interest on the maximum amount of credit you've been approved for, you only pay interest on what you borrow. With a line of credit, the interest rate tends to be variable, meaning that it can change each month.

Personal loan

A personal loan allows you to borrow a lump sum of money from a financial institution for various reasons. Whether it be to purchase a new car, start a business, or pay for a home renovation, once approved, the entire sum of money will be deposited into your account. Personal loans in Canada tend to have a fixed interest rate that is based on the prime rate set by the Bank of Canada.

Ultimately, one of the main differences between the two is that a personal loan, and other loans for that matter, directly deposit the entire sum of money into your account, while a line of credit provides you with ongoing access. Before opting for either one, make sure you consider your plans for spending and saving so you can choose one that benefits your financial goals.

What's the difference between a credit card and a line of credit?

A line of credit and a credit card are similar in some ways, as they both have a credit limit. However, the way you access your money will differ. A line of credit tends to have a higher credit limit than a credit card and is typically used for large purchases, whereas a credit card is typically used for everyday purchases.

Do you pay interest on a line of credit?

Yes, as with any other type of loan, when you get a line of credit, you will need to pay an interest rate on the amount of money you borrow. The interest rates are usually based on the prime rate from the Bank of Canada and can fluctuate on a monthly basis.

Get a personal line of credit with KOHO

Borrowing money from a financial institution comes with risks. And, like with all bank loans or payday loans, there are line of credit pros and cons. So, before signing an agreement, make sure you get a clearer picture of what your financial goals are.

At KOHO, we help Canadians manage their money with ease. Whether you're looking for a line of credit, are interested in opening a high-interest savings account, or want to improve your credit scores, you can leverage our products and resources at your convenience so you can reach your goals in no time.