A Guide to How Lines of Credit Work in Canada

How a Line of Credit works in Canada is with flexibility and the borrower in mind. When a borrower is offered a Line of Credit, they don’t have to apply every time they need to withdraw from the loan. They can borrow as much or as little as they want when they want, up to the approved limit. And only pay interest on what they borrow. The borrower can use the funds for almost anything they want or need. The application journey is like most loan processes.

Lines of Credit: A Powerful Credit Tool for Canadians

A Line of Credit in Canada can be a good loan tool for any qualified Canadian to use. It offers a borrower the advantage of making their loan work the best way for them. It’s a versatile way to borrow money, and it doesn’t have to be for a specific purchase. The borrower is in charge of where they spend their loan funds.

The customer applies once for the loan, and if they’re approved, they can borrow as much or as little of their available credit as they want when they want. Then they make payments on what they’ve borrowed and only pay interest on that borrowed amount.

Benefits of Using a Line of Credit

When a borrower needs flexible lending, a Line of Credit could be an option. Unlike a mortgage or auto loan, a Line of Credit can be spent on whatever the borrower’s needs or wants are, or even saved for an emergency.

Benefits include:

• Apply once, use as little or as much as needed up to the approved limit.
• Choose when and where to spend funds.
• Funding is available on an ongoing basis.
• Pay interest only on funds used.
• Reusable funds. Use, repay, and use again!

Secured Line of Credit vs. Unsecured Line of Credit

There are two types of Lines of Credit, a secured Line of Credit and an unsecured Line of Credit. Either loan could be helpful to the borrower depending on their loan goals and the lender who approves them. Let’s break them down.

Secured Line of Credit
This kind of loan is secured with collateral to back up the loan amount. Collateral is an asset of monetary value that can be used for unpaid debt compensation. A secured Line of Credit may offer the borrower more money than an unsecured Line of Credit, depending on different factors like the lender, credit score, and the collateral.

Unsecured Line of Credit
This type of loan does not have any collateral to secure it. So, there is no asset guaranteeing the debt. Depending on the lender, the borrower’s credit report, credit score, and other factors will be reviewed during the loan process.

Line of Credit Process

Once a borrower decides to pursue a Line of Credit, they’ll have to prepare for their loan journey. No doubt, they’ll have questions. You can reference our Cash Money Line of Credit page if you have additional questions. Below, a generalized process is explained.

Eligibility and Application

An applicant will need to be able to check off all the requirements of the lender. Since different lenders may want different qualities or documents, here is a general list.

• Meets specific adult age
• Government-issued ID
• Reliable source of income
• Working bank account
• Active phone number
• Home address
• Any other required documentation

After all requirements are met, the applicant can apply. Depending on the lender, the application could be online, in person at a branch, or on the phone. Once the application is submitted, the applicant will wait to receive a loan decision.

Approval and Credit Limit

The lender will want to know how creditworthy any potential customer is. Most, but not all, of the time, they’ll want to assess the customer’s credit report and possibly their credit score. They’ll also confirm their ID and documentation, and any other information the specific lender deems important.

If the application is approved, the applicant will be notified and sent a loan agreement and other documents to review and sign.

The credit limit of the Line of Credit is determined by the lender.

If the application is denied, the applicant will be notified.

Accessing Funds and Repayment

How the borrower accesses their funds depends on the lender. Some lenders offer electronic funding, direct deposit to a bank account, or cash withdrawal.

Repayment of borrowed funds and interest also depends on the specific lender. Some may encourage a pre-authorized debit for convenience, an electronic payment option, or cash payment services. It is important to make loan payments on time. If payments are late or missed, they could poorly affect your credit score.

Using Your Line of Credit

Congratulations to the Line of Credit borrower! Before signing their loan agreement, they’ll know their approved loan amount and terms and conditions. Now they can use as little or as much of their funds, up to their limit, as they’d like. They can borrow, pay back, and borrow again. Or they can leave the funds available until another time. It’s up to the borrower.

Budgeting Tips

Because a Line of Credit is an accessible and flexible loan, the borrower can conveniently use it for lots of different purchases. It’s a good rule of thumb to keep track of what is bought and the cost to compare to the loan’s available credit. This way, the repayment amount won’t be a surprise.

The borrower may want to spend the Line of Credit on only specific purchases, so making records of that loan activity could be beneficial.

Line of Credit, a Loan to More

More versatility, more opportunities, more for the borrower. The Line of Credit process can be similar to other personal loan journeys. But the freedom of getting to use the funds the way the borrower wants is a winning perk!