Types of Debt

Types of Debt » Lines of Credit Debt

Lines of Credit Debt

More than three million Canadians have home equity lines of credit, 35% of Generation Z Canadians plan to get a personal loan in 2021 and 13% of Canadians get personal loans to pay off their credit cards.

The number of people across the country turning to personal lines of credit to get by continues to rise.

While lines of credit can be a positive way to pay for an unexpected financial emergency or a high-cost item once every so often, it’s important to stay on top of the balance owed.

As thousands of people find themselves trapped making interest-only payments towards what they owe, it’s important to be aware of the support available if you find yourself in financial trouble.

Write off up to 80% of your unaffordable debt

What are lines of credit?

Lines of credit are loans that allow you to borrow funds up to a fixed limit. They are very similar to credit cards and can be paid back at any given time and interest is only paid on the money you borrow. People use lines of credit for many reasons, such as home improvements or to fund business expenses.

However, the repayment schedule can often be hard to stay on top of if you’re only able to make the minimum monthly payments. This is because they are usually equal to the monthly interest charges.

As with most loans, it’s not just the interest rates that can make people feel unable to pay back their credit lines. One of the main benefits of a line of credit is its flexibility. You don’t need a specific reason to borrow money and while this is good to cover any unexpected expenses but it can also lead to impulse spending.

Many people who turn to lines of credit quickly find themselves borrowing the maximum amount available to them, increasing monthly payments spiking to the point where it becomes no longer feasible to pay back.

Most people will opt to just make their minimum payments each month because it is the cheapest option of paying it back. However, as withdrawals and repayments are on an unscheduled basis people are often shocked at the level of interest that they pay back because interest is gathered from the moment any money is borrowed and interest calculations are often complicated.

The lenders also preserve the right to spike the interest levels at any given time, meaning many can end up paying back almost double what they borrowed.

Are there different lines of credit?

You have the option of two different lines of credit – a secured or unsecured line. Your choice will depend on various factors, including the reason behind the loan and if you have an asset that can be used as collateral.

Secured line of credit

Secured lines require you to use an asset for collateral, such as your home. While you are likely to pay lower interest rates with a secured line of credit, it’s important to be aware that the lender can take possession if you don’t pay back what you owe.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a secured debt where your house acts as collateral. This usually has a higher credit limit and lower interest than other lines of credit and loans.

Unsecured lines of credit

Unlike a secured line of credit, an unsecured line isn’t secured by an asset. Some examples of unsecured lines include personal lines of credit and student lines of credit.

Personal line of credit

A personal line of credit is often used for unexpected expenses or debt consolidation. You could use a personal line to consolidate higher-interest debt into one payment. The interest paid on an unsecured personal line is usually lower than credit cards and personal loans.

Student line of credit

Those covering the cost of college, or post-secondary education – often turn to a student line of credit. A student line can be used to pay for basic expenses such as books as well as bigger costs like tuition and housing.

How much interest will I pay on a line of credit?

The interest on a line of credit is variable and may go up or down over time.

As mentioned you pay interest when you borrow money from the day you withdraw funds until you repay the balance in full.

The interest rates you pay on a line of credit may be affected by your credit score. Your credit score tells lenders how risky it is to lend you money. Typically if you have a high credit score you’ll make lower interest payments on your line of credit.

Line of credit debt

How credit line debt can affect your life

No matter whether you choose unsecured credit lines or secured lines they can impact your life in a number of ways.

Personal Finances

Interest rates can range from 9.30% -17.55%, and some banks even charge fees just for maintaining your line of credit. These are charged whether you withdraw funds or not and running up a high balance can ultimately hurt your credit score.

This then has a knock-on effect in terms of being accepted for other forms of credit such as mortgages or auto loans. Given that interest rates are variable on credit lines and can increase at any time, people may have to turn to other forms of credit just to help pay the interest. Drawing more money out of your credit line also increases your minimum monthly payments, meaning people often have to cut back elsewhere just to make payments.

Mental Health

Debt and mental health struggles often go hand in hand.

While a line of credit might seem easy to manage when it comes to covering the cost of one-off or unexpected purchases if you begin to struggle to keep on top of the outstanding balance it can have an impact on your mental health.

According to the mental health charity Mind, that those who already live with a mental health problem are also more likely to fall into debt. The stigma that surrounds debt also leaves people feeling like they can’t tell their creditors about their mental health issues and companies may not consider your mental state when making decisions about your financial difficulties.

Relationships

Debt can affect more than just your credit rating. The weight of debt on a person’s shoulders mixed with the stress and anxiety of trying to claw your way out of debt often impacts on the relationships with the people around them.

If you are struggling to repay your line of credit and your minimum pay

The strain of paying back into your credit line has the power cause tensions between partners, which can hinder discussing the problem. If your minimum payments are increased, this often means you have to cut back elsewhere which can prevent time being spent with friends, family and loved ones.

Warning signs of line of credit debt

Given the flexibility of lines of credit and the easiness of minimum repayments, it might not always be easy to spot when it is beginning to spiral into the realm of unaffordability. The points below are some signs to look out for if you feel you are struggling:

Your balance isn’t reducing by much each month due to interest
Feeling stressed and anxious about the balance
Using other forms of credit to help you meet the minimum payment
Leaving yourself short for other bills trying to make higher payments
Avoiding conversations about the issue

Many people feel guilty or ashamed of their debts, and so it will not always be apparent that they are struggling. Below are some points to look out for if you think someone you know is having financial struggles:

Avoidance of spending, cancelling plans often
Noticing unopen bills piling up
They are noticeably stressed or withdrawn for no clear reason
They avoid the topic altogether

If you are unsure of what to do next, lenders may be able to offer you repayment assistance. Money managers are also available online to help you budget for your payments.

Line of credit debt

line of credit debt

How to get help

Debt can be a lonely place and can often leave people not know where or who they can turn to. The below points are some steps you can take to try and get back on track.

Open Up – Talking about your struggles can often give you some reassurance that you are not alone and help you find the support you need to tackle the problem head on

Seek Advice – Contact the provider to try and negotiate your payments, sometimes explaining your situation will help to lower the repayments.

Get Help to Clear Your Line of Credit Debt – Debt doesn’t have to take over your life, at A Fisher & Associates we can help you make your debts manageable with confidential, non-judgmental advice from our expert advisors.

Other types of debt

Unsecured Debt

An unsecured debt is a loan that doesn’t require an asset as collateral…

Secure Debt

A secured debt is a loan that is backed by assets which reduces the risk…

Tax Debt Help

Owing tax debt to the Canada Revenue Agency (CRA) can be daunting…

Utility Bills Debt

Falling behind on everyday essential utility payments such as electricity or gas…

Car Loan Debt

Getting on the road is a costly affair with Canadians relying on long term car loans…

Mortgage Debt

Mortgages are loans provided to buy a home. These are secured against the property…

Payday Loan Debt

Payday loans are a quick fix for people who are struggling to make their income stretch…

Cellphone Debt

Most cellphones are taken out on a payment plan in which you make monthly payments…

Medical Debt

While healthcare in Canada is predominantly covered by Canada’s universal health…

Student Loan Debt

Student loan debt is one of the most common debts in Canada with the total…

Credit Card Debt

Credit card debt is the most common unsecured debt type in Canada, however…

How we can help you with your debt

You’re on your way to resolving your debt problems, this is what will happen next.

Fill out the form and arrange a call back with one of our debt advisors.

We will then run through all of the options available to you and advise you on which is the best option for you

We will then help you put the debt solution in place that will help you get back on track