Personal Lines of Credit are Charge Cards on Steroids

The financial institution where you do your banking may offer you a line of credit.  If you have a good credit history they may offer to give you an unsecured line of credit for $5,000 or $10,000 depending on your credit worthiness etc.  If you want a large line of credit say $100,000 it will be a secured line of credit.  You will have to provide the bank with some form of security, such as the equity in your home or cottage.

The advantages of a line of credit are similar to those of credit cards.  You don’t have to use it, you can use it a little bit or you can max it out.  You don’t have to get any approval to use it and you can use it to buy whatever you want.  It can be a great resource to draw upon in a time of emergency, when you don’t have the cash to pay for it  e.g. your old car dies and you need to replace it.

Also, because the line of credit is often secured by one of your personal assets the risk to the financial institution is much lower than credit cards so instead of charging 19% interest, as is the case with credit cards, a line of credit may be around 4%.

However, like the credit card, the advantages of  the line of credit are also its disadvantages.  Just as you can go temporarily insane and buy all kinds of things you didn’t need on your credit card, you can do the same thing on your line of credit — except on a higher level!    You might regret those expensive shoes you bought when the VISA bill comes in the mail.  But that is nothing compared to the $30,000 kitchen renovation you financed on your line of credit.

Perhaps the main problem with a line of credit is that there is no requirement to pay back the principal, the amount you borrowed.  The monthly interest charges on that $30,000 kitchen renovation is only $100 per month and you can easily afford that.  Trouble is 5 years later you may still owe $30,000.  And then what happens when interest rates go from their current low levels to higher historic levels.