There may be a time in your life where you need access to a large sum of money at short notice. Whether you need it urgently due to an emergency or need some extra money for personal spending, a line of credit is a choice to consider before taking out an additional loan.

What is a Line of Credit?

A line of credit is an agreement between you and your bank in which they give you access to a predetermined amount of money for you to use at your discretion. The limit set is secured against the equity of your home, and you will usually get a lower interest rate as you present a lower risk to the lender.

Line of Credit Pros

  • Low-Interest Rate: One of the main advantages of the line of credit is that you are given a lower interest rate by using the equity of your property to secure the loan. As they can take your property if the credit isn’t repaid, the interest rate doesn’t need to be as high as unsecured personal loans for the lender to make up for losses.
  • Early Repayments: There is nothing stopping you from repaying your line of credit earlier, allowing you to further reduce the interest you are paying over the term of the loan.
  • Conveniency: A line of credit is easier to gain access too compared to credit cards and other personal loans. You are also provided with multiple withdraw options for ease of use.
  • Flexible: The time limit set for your line of credit can be quite generous, allowing you to tap into your equity whenever you need it during the term you agree on.

Line of Credit Cons

  • Self-Control: Large sums of money with easy access will only cause you more problems in the future if you have no financial discipline. Be careful when accessing your line of credit to make sure this doesn’t happen.
  • Equity Loss: Incorrectly managing your equity can result in increased repayments, permanent loss of equity or even losing your property as repayment.
  • Time Management: When repaying your line of credit, staying on top of the repayments is vital to enjoying the lower rate being offered. Having to extend the repayment term will mean more interest to pay, voiding the benefit of using a line of credit in the first place.

How to Protect My Home

It can be scary putting your house on the line for a loan when you think of the worst possible outcomes. Property depreciation will reduce the amount of equity you have and may require you to pay back more than what the house is actually worth. To prevent this, we recommend not using the full amount of your equity. Doing so will leave you with a portion of your equity to fall back on in case something bad happens. Outside of line of credits, there are a number of other home loan types that may better suit your needs.

A line of credit can be your greatest ally or the worst enemy in your time of need. Making sure you have the financial discipline to correctly manage your line of credit will allow you to enjoy its benefits.