What’s a line of credit and when should I use one?
By ATB Financial 11 May 2023 5 min read
A personal line of credit is a revolving loan, which means you can pull funds from it whenever you want and repay the principal at any time. A line of credit is attached to a deposit account and is a lower-cost borrowing option than a credit card, for example. Payments on lines of credit may vary between financial institutions. At ATB, interest-only payments on any borrowed funds are required on the last day of the month. After you repay funds, you’ll be able to use those funds again as often as you like.
Interest and making payments
You can access a line of credit loan the same way you would any of your deposit accounts— with your debit card at an ABM, ATB branch or through online banking. The debit card you use must be assigned to the account or you can make a transfer from your line of credit to your chequing account.
With a line of credit, you are accountable for making a minimum payment each month, and usually, this minimum payment is equal to the monthly interest. That said, you will always have the option to repay more, which is encouraged. Paying back the interest plus a little more will decrease the total amount owing, effectively decreasing your debt and future interest payments. Interest rates are variable and based on ATB’s prime rate.
You have the option to make manual payments or set up automatic payments from your deposit account. The account you make payments from can’t be the same account linked to your line of credit, because you can’t use available funds on your line of credit to make interest payments.
What makes a line of credit different from a loan or a credit card?
Line of credit vs. a loan
Unlike a line of credit, a loan has a fixed end date and a fixed repayment schedule. Once you pay back the loan, you no longer have access to its funds. Monthly payments on a loan are always a fixed amount, whereas a minimum payment on a personal line of credit is the interest charged on the amount owing. That means your line of credit repayment can change from month to month.
Line of credit vs. credit card
A line of credit and a credit card are both revolving loans, so once you pay them back, you do have access to the funds again. There are two main differences between them—how you make repayments and interest rates.
With credit cards, you owe a minimum monthly payment of the balance owing, including interest. With lines of credit, you owe the monthly interest on the total balance for the month. When comparing interest rates, a credit card will usually have a higher interest rate than a line of credit.
Secured line of credit vs. unsecured line of credit
You can secure a line of credit loan by putting collateral against it, and the most common collateral used is property. The advantage of securing the line of credit is it will lower the interest rate you’ll have to pay on the amount you borrow.
An unsecured line of credit does not have collateral put against it. Otherwise, it works the same as a secured line of credit but will typically have a higher interest rate. That said, the interest rate of an unsecured line of credit generally still be lower than a loan or credit card. Read how to use a credit card and line of credit effectively.
When should you use a line of credit?
Typically, you wouldn’t use a line of credit for a large one-time purchase like buying a new car. In that case, a regular loan would be more suited because the amount of money you need is fixed. There’s also no benefit to using a line of credit for your daily transactions because you’re going to have to pay interest on it. Here are some situations you might use a line of credit:
Lend and Spend
One strategy of reducing your interest load while gaining the benefits of a credit card purchase (like earning rewards points and having purchase protection insurance) is to make a large purchase on your credit card, and then pay off the credit card with your line of credit. You can then pay back your line of credit with a lower interest rate versus paying a higher credit card interest rate.
A line of credit offers security in emergencies if you don’t have an emergency fund in place. For example, you can use a line of credit to pay for unexpected expenses like a significant home repair. If you will have a shortfall at the end of the month and you don’t have a savings account to lean on, a line of credit can help you through it.
Instead of a credit card
If you’re making a larger purchase and plan to have it paid off within a year, a line of credit is a great solution. You can work with your Personal Banking Specialist to determine a set payment to have the balance of the item paid in full within a set period of time. This would work well for purchases such as large appliances. A line of credit is a lower-cost borrowing option compared to credit cards, so you’ll pay less interest. Plus, with flexible repayments, you can pay back the principal when extra funds come your way, and you’ll be able to access those funds again when needed.
What is a HELOC?
A HELOC is a home equity line of credit. It uses the equity in your house as collateral, and it’s a mortgage product. Besides using your home equity as the security and having lower interest rates, it works the same as a regular line of credit. Once you have a home equity line of credit, you will have access to it until you sell your home.
People use HELOCs to make larger purchases because they have lower interest rates than loans and personal lines of credit. For example, you can use a HELOC for a significant home renovation or a down payment on a second property.
Getting a line of credit
To learn if you’re eligible for a line of credit, call our Customer Care Centre or visit a personal banking specialist at your local branch. They can review your credit history and explore the best borrowing option for you.