You took out a line of credit to consolidate debt, renovate your kitchen, or take your family on a dream vacation, but now you’re struggling to keep up with the minimum payments. Failing to make your payments on time can negatively impact your credit score making it more difficult to borrow money in the future. What do you do? While you may feel overwhelmed, you have options.
Let’s explore what a line of credit is, the benefits and challenges, and what you can do to pay it off and improve your financial situation.
What is a Line of Credit?
A line of credit allows you to borrow money up to a maximum credit limit. You can access a little or a lot of the credit when needed, up to the maximum amount. You only pay interest on the money you borrow.
The interest rate on a line of credit is often variable, meaning it can go up and down over time. Your exact interest rate will depend on your credit score and other factors. Typically, the higher your credit score, the lower the rate on your line of credit.
Types of Lines of Credit
There are different types of lines of credit (LOCs) you can apply for, including:
- Home equity line of credit (HELOC). A secured line of credit where the lenders secure or attach the funds borrowed against your home
- Business line of credit. Access a predetermined amount of credit to use for daily business expenses.
- Student line of credit. Available to students to pay for costs related to post-secondary education.
- Personal line of credit. Use a personal line of credit for nearly anything, even consolidating higher-interest debt.
- Investment secured line of credit. Use investments as collateral to borrow at a lower interest rate.
- Unsecured line of credit. A line of credit that doesn’t require an asset to secure the loan.
How Do You Pay Back a Line of Credit?
Similar to a credit card, each month you’ll get a statement showing how much you owe on your line of credit. You’re responsible for making your minimum payment, which is typically equal to the amount of interest you owe. Here’s where it’s easy to fall into a cycle of debt. If you only pay off the interest each month, you never make any real progress because you’re not touching the principal amount.
To repay a line of credit, you need to pay more than just the interest payments, so that the principal balance goes down. If you are unsure whether this is possible for you, or how to calculate this on your own, speaking with a Licensed Insolvency Trustee (LIT) can help you assess this and your other debt relief options.
Benefits and Challenges of a Line of Credit
If you’re trying to decide if a line of credit is right for you, consider the potential benefits and challenges which include:
Benefits
- Lower interest rate. Typically offers lower interest rates than credit cards, personal loans, or payday loans.
- Flexible repayment timeline. As long as you make your minimum payment, you decide when you want to pay back your line of credit.
- Flexible use. You can use a line of credit to purchase nearly anything.
- Wide availability. Most banks and credit unions offer lines of credit.
Challenges
- Easy to fall into debt. Since you can use the loan up to its maximum amount, and repay it on your own schedule, it’s easy to fall into a cycle of only paying back the minimum monthly interest charge. If the balance comes due and you find you don’t have the money to repay more than the interest only amount, this means the line of credit balance will not go down.
- Variable interest rate. If your line of credit has a variable interest rate, this can cause it to fluctuate from month to month. If the rate goes up, you can find yourself owing more on your balance.
How to Overcome Debt From a Line of Credit
If you have a line of credit and can’t afford your monthly payments, this can be extremely stressful, especially if you have other debts. But you have options. Start by speaking to a Licensed Insolvency Trustee (LIT). A LIT is a debt professional who can assess your financial situation and advise you on what debt solutions are available. Here are a few solutions you can ask your LIT about to help you overcome debt from a line of credit.
Debt consolidation
Involves rolling multiple debts up and paying them off with a larger loan. The goal is to find a debt consolidation loan with an interest rate lower than what you’re currently paying. This can help to lower your monthly payments and the amount of interest you pay over time. The largest challenge is that you’ll usually need a strong credit score to qualify for a consolidation loan.
Consumer Proposal
If you can no longer afford to make your minimum payments, or feel you are never going to pay off your debt by making interest only payments, a Consumer Proposal could be an option which would be reviewed in an initial consultation with a Licensed Insolvency Trustee (LIT). A Proposal is a government debt relief program. You work with your LIT to create an offer to pay your creditors typically a percentage of what you owe, extend the time you have to pay, or both. If accepted, a Consumer Proposal is a good option if you can make the monthly payments.
Bankruptcy
Personal Bankruptcy is another government debt relief program through which you can eliminate most unsecured debts. In exchange, a LIT will sell many of your assets to try to settle debts with your creditors. Many individuals may fear losing everything, however there are certain things which are considered protected assets that you get to keep, and this can vary by Province which is why it is so important to talk with a LIT to discuss your personal situation so they review all of this with you. While Bankruptcy is generally a last resort, for some people it’s the best option
Need Help With Your Debt?
Whether you’re dealing with debt from a line of credit, a credit card, a bank loan, or all three, a Licensed Insolvency Trustee can help you get back on track. Don’t navigate through your debt alone. – We Can Help™.
For a free, no-obligation consultation contact Allan Marshall & Associates at 1-888-371-8900, or complete our online contact form.
