Can somebody, please explain to me the following regarding 'line of credit'

• What is it?
• How does it work / operate?
• How is interest calculated on it?
• How is the principal calculated?

What are the advantages and disadvantages?

I am sorry it does sound like a business studies assignment, I promise you it isn't. This is something I did not come across in England and my bank has offered me this and I don't understand it and just wondered what the pros and cons are.

many thanks to all my BE friends.

kind regards
Ruby.

It is really just like an overdraft facility in a separate account. You can draw up to the LOC limit anytime you want and for any purpose. Usually by transferring funds into your chequing account but if you do on line banking you can pay bills from the LOC as well. Interest is calculated daily on the amount overdrawn but is posted to the account once a month. As a minimum you must pay the interest each month. How much, if any, you pay off the principal is up to you.

Advantages: cheaper interest than a credit card, a convenient way to smooth cash flow if your bills all come at once.

Disadvantage: it is still borrowing so it has to be paid back at some point.

The LOC can be unsecured and these usually have a fairly modest credit limit. You can also secure it against the equity you have in your home (up to a maximum of 80% of value for mortgage + LOC). These are call home equity lines of credit (HELOC) and can be quite substantial.

Unlike an overdraft you have to pay a minimum amount back (like a loan) each month, usually a % of the total you have used or a cash number which ever is greater.

Thing to watch out is that you have to pay pack whatever the agreed percentage of the balance is every month as a minimum. On a large line of credit that can be a fairly large sum.

For example if you finance a house on a LofC so you can pay it off fast with no interest penalties, the mandatory monthly payment can be way more than a mortgage payment.

% amount to pay back? On every LOC I have had it is interest only.

On the UNSECURED LofC
"low minimum monthly repayments of just $60 or 3% of your balance, whichever is greater"

Secured LoC is interest only. My example of house purchase is flawed clearly. $20k on a car is going to cost you $600 a month minimum to repay, plus the interest.


http://www.banking.pcfinancial.ca/a/...Borrowing.page

From Scotiabank

Interest-only minimum payment will be the greater of the interest portion only of the outstanding balance on your statement, or $50, subject to your minimum payment being no more than the outstanding balance on your statement.

I do have an unsecured LOC that I never use. I'll have to check on the repayment terms to see if that requires a minimum % repayment.

Thanks to all of you for your responses. Can somebody give me a formula that is used in all these calculations.

regards
Ruby

Usually unsecured LofCs require a monthly 3% (P&I) payment but, depending on one's relationship with the bank, it can be interest only.

I remember seeing the terms of a LOC once where the repayments were a fixed sum or a % of the outstanding balance, whichever was higher.

The interest on the minimum amount one could borrow was considerably higher than the fixed sum.

Only when the outstanding amount was much less than the minimum could the fixed amount have been greater.

Something to watch out for on a HELOC - and this may not be the same everywhere - is the property with the equity may need some sort of appraisal/registry thing and that may involve a fee of a few hundred $$.

Depending on what one is borrowing and speed of repayment that can turn a seemingly good deal into a bad one.

some banks will waive this fee for you though, depending on reasoning behind the HELOC.

TD is 3% or $150 a month whichever is higher at the time of billing.

No it's not. I have a HELOC with TD and it's interest only. Moreover there was no fee for the appraisal.

that was for an unsecured LOC I was refering to as that was the payments most posters were talking about.

yep a HELOC with TD is interest free and they do mainly waive the fee as I said but they can and sometimes charge it.

I wish.