What to Remember When You Take Out a Secured Line of Credit

A secured line of credit is taken against a tangible, saleable asset. If the borrower is an individual, the collateral can be his/her house and in the case of businesses, the security can be the accounts receivable, inventory or any other business property. Such a line of credit establishes a certain credit limit and allows you to draw cash from the credit line as and when you need.

The repayment term for the periodic cash withdrawals is typically short. You only have to make payments on the credit that you have drawn. It is much easier for individual borrowers and businesses to get secured credit lines from banks and lenders in comparison to unsecured credit lines, which are not backed by collateral. Here are some things you should keep in mind when you take out a secured credit line.

Favorable, adjustable rates of interest

A good thing about secured lines of credit is that they are offered at lower rates of interest when compared to unsecured credit lines. This is because the credit line is secured against a tangible asset such as your home, which the lender/bank can take possession of to recoup the lent credit.

A secured line of credit often comes with an adjustable interest rate that moves in accordance with the prime rate. The lender determines an interest rate margin, which depends on your repayment ability, credit history and in case of businesses, their profitability and projected risks.

Make sure that you opt for competitive interest rates by comparing the rates offered by different banks and lenders.

Convenient withdrawal

Make sure that your lender offers you enough flexibility so you can make (a) cash withdrawals (b) online transfers from and to the line of credit (c) debit to the credit line directly (d) write checks without any associated charges.

Flexible review and management

Verify with your bank or lender if you can review your line of credit online whenever you wish to. Make sure that there penalties are not charged when you make higher repayments towards your outstanding credit balance. See to it that you enjoy some degree of flexibility when it comes to managing and reviewing your credit line.

Option for credit renewal

Verify if the credit line comes with a renewal requirement. In some cases, the credit line is subject to a yearly review based on which you will be allowed to renew the line. In other cases, your credit line will remain open for a period of up to ten years without the need for a renewal.

It is a good idea to have an easily accessible, emergency cash fund. If you are a cash-poor homeowner with substantial equity built in your house, it makes sense to go for a secured line of credit during urgent cash needs. But make sure you draw from the line only in the event of an emergency and for meaningful, high-yield investments. You will be charged an interest rate that is a little more than the prime rate (i.e. plus one percent typically) when you take out a secured credit line. Also keep in mind that you have to pay a fee to set up the credit line and a discharge fee at the time of closing.

For more information of secured lines of credit in Ontario, contact a mortgage lender at Canadian Mortgages Inc.