Mar 142018

A revolving line of credit is a very useful tool. It can be used to pay down higher interest credit card debts, cover business expenses, or pay regular household bills. To use a line of credit (LOC) properly we should understand how it works, and how the interest is calculated.

At the time of set up a new LOC account will start with a balance of $0. Unlike a mortgage, car loan, or other amortized loan, the interest cost on a LOC is only calculated based on the amount of outstanding balance we use. This means if we don’t use the LOC we don’t pay any interest. 🙂

Interest Calculation

The interest rate on a LOC will typically range from 3% to 12% depending on the borrower’s credit history and their relationship with their banks. Interest is calculated on a daily basis on the amount of principal balance. For example, let’s say we borrow $1,000 on March 1st. Then on March 10th we pay down half of the debt, $500, and don’t do anything else for the rest of the month. In this case interest will be charged on the $1,000 for 10 days, and on $500 for the remaining 21 days of March. The interest amount will be accumulated and charged at the end of every month.

Using 5% interest rate as an example, we can calculate the cost of borrowing in the example above.

Interest cost from March 1st to March 10th = 0.05 x ($1000)*(10/365) = $1.37
Interest cost from March 11th to March 31st = 0.05 x ($500)*(21/365) = $1.44

We add the two amounts together to get $2.81. This is how much interest will be charged for the month of March. If we pay down the remaining $500 principal, and $2.81 interest balance on March 31st and do not borrow anymore, then there will be no interest charges in April.

Different Ways to Use LOCs

Since LOCs often have lower interest rates than credit cards we can transfer balance from a LOC to a credit card to save on interest costs. I also like to use my LOCs for emergency liquidity to pounce on a time sensitive investment opportunity or to cover a major car repair. I have also used a LOC in the past to pay down my student loans which was at a higher interest rate.

LOCs can be accessed through online banking. We can use it pay bills online, or send Interac e-Transfers. We can even order cheque books for our LOC accounts so we can write cheques to anyone. My regular chequing account only allows up to 10 free withdrawals every month. So sometimes I would use my LOC to cover some bill payments if I don’t want to exceed my chequing account limit. 😀

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Aug 312013

A home equity line of credit or HELOC is a revolving credit secured by a home. It can be used to lower borrowing costs, or pay for tuition, or unexpected expenses. It can even help people invest 😎 If we’ve worked hard to build up equity in our homes then why not make that equity work for us? 😉

Benefits of having a HELOC.
Since it’s backed by a hard asset (our home) HELOC interest rates are lower than other types of loans like a traditional line of credit. This means if you have student loans, credit cards, or any other high interest debt, you can transfer the balance to a HELOC and save money on interest since most HELOC rates today are just 3.5%.  They are also very accessible because we can get HELOC money via online banking, cheques, or even ATMs.

Applying for a HELOC.
I opened up a HELOC earlier this year. I just called my bank (CIBC) and asked to speak with someone to help me get a home equity line of credit. A representative went over the options with me like if I wanted to make “interest only payments” and if I wanted insurance coverage. I’ve always opted out of any insurance for loans but that’s just my personal preference. A couple weeks later, an appraiser called and made an appointment to come assess my home, which he did the next day and took about 10 minutes. He then gave his report to my bank. After that I met with a lawyer that my bank recommended and signed some legal documents.13-08-legaldocheloc

About a week after that my HELOC was ready to go 😀13_08_helocpapers_bankacct

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