February 17, 2023
| Loans

What is an Unsecured Line of Credit?

A line of credit is flexible, easy to use, and accessible. As an alternative to personal loans and credit cards, a line of credit from your financial institution can mean lower costs, too.

Learning more about lines of credit can make your decision about whether to apply for one a little easier. By being informed, you’re in a better position to make a good choice.

Let’s take a closer look at lines of credit for individuals and how they work. We’ll review secured and unsecured lines of credit, how these offerings are structured, their unique benefits, and much more.

What is a line of credit?

The Financial Consumer Agency of Canada defines a line of credit as “a type of loan that lets you borrow money up to a pre-set limit.” This is a key difference from many other types of loans, which are provided as a lump sum. With a line of credit, you can simply withdraw funds when you need them. You may hear a line of credit called revolving credit, a term that also applies to credit cards.

Like loans and credit cards, you must pay back money borrowed through a line of credit with interest.  However, the ability to limit borrowing based on your needs can mean more manageable repayments. That’s something many other types of loans simply can’t offer.

While credit cards also allow you to only use the money you need, there’s still a major difference between cards and lines of credit. To put it simply, lines of credit can offer a lower interest rate and more flexible repayment periods. Ultimately, that can save you money.

Check out our example of a line of credit vs. a credit card to see the potential for savings.

What’s the difference between a personal line of credit and a business line of credit?

A business line of credit and a personal line of credit are very similar. They have the same basic structure and purpose — to provide access to money, up to a preset limit, when you need it.

The differences between these types of revolving credit come in the application process and how they’re used. Lenders will focus on a company’s creditworthiness when deciding about a business line of credit. For a personal line of credit, lenders review your personal finances and related factors: your income, credit history, and current debt.

Business lines of credit are intended for business purchases and expenses. On a practical level, they’re similar to business credit cards. It’s simply not a good idea to use either type of credit for personal purchases. Mixing personal and business finances can lead to complications with taxes and other issues.

Personal lines of credit can be used for a wide variety of needs and wants. They can provide financial support for everything from home repairs following a major storm to taking a vacation.

What is an unsecured personal line of credit in Canada?

Lines of credit can be secured or unsecured. The difference between the two is simple:

  • An unsecured line of credit doesn’t require you to put up an asset or assets you own as collateral. Unsecured line of credit rates in Canada are generally higher than those for secured lines.

  • A secured line of credit requires that you use an asset or assets as collateral. If you can’t make your repayments, the lender may take that asset. The benefit you receive in return is access to lower interest rates.

If you have a good handle on your personal finances, applying for an unsecured line of credit in Canada can offer some major benefits. Even though the interest rate is higher for unsecured lines, it can still be significantly lower than the rates offered by credit cards.

Are there any downsides to unsecured lines of credit?

An unsecured line of credit offers plenty of benefits. That includes low interest rates as compared to many loans and credit cards. There’s also the revolving nature of this credit to consider — as you pay it back, you can access more credit.

So, what are the downsides?

Lines of credit often come with variable interest rates. In other words, an interest rate isn’t locked in when you take out the line of credit.

Access to credit can be difficult to manage without good financial discipline. Make sure you have a good plan for making your monthly payments whenever you take out money. Check that your budget can handle the added expense of paying interest and principal.

Lines of Credit from Innovation Federal Credit Union

As a member of Innovation with a line of credit, you’ll discover low minimum payments, low interest rates, and the option to connect your chequing account to your line of credit. Enjoy added convenience along with the standard benefits of a line of credit.

Apply for a free, no-fee account today to get started!