INDIVIDUAL RESEARCH ASSIGNMENT

FIN- 2501
“Line Of Credit Products in Canada”
By-Gautam Tandon
N01396914
Submitted to-Professor Kalpana Pareek
 1

WHAT IS A LINE OF CREDIT (LOC)?

A line of credit (LOC) is a contract between a financial entity (usually a bank) and

a borrower that specifies the maximum loan sum the customer can take out. The

creditor will use the funds from the line of credit at any point as long as they don't

go beyond the agreed-upon maximum balance (or credit limit) and obey all other

provisions of the deal, such as making minimum contributions on time. It should

be made available as a service.

A line of credit (LOC) is a fixed amount of money that you can borrow at any

time. In the case of an unrestricted line of credit, the creditor will draw money out

if needed before the cap is met, and if it is returned, it can be lent again.

Revolving Credit is another name for it. It's literally "on-demand" access to credit.

The term "revolving credit" was coined to describe a form of revolving account in

which a customer would borrow funds up to a predetermined amount, repay it, and

borrow again in a nearly never-ending revolving loop. (Thakur, 2017)

Interest rates on different goods differ and are monitored on a daily basis to ensure

that they remain competitive. The Financial Consumer Agency of Canada (FCAC)

guarantees that federally controlled financial institutions follow consumer

protection laws, encourages financial education, and educates customers about

their rights and obligations.

Various types of Lending Products

 2

Line of Credit products can be broadly divided into two categories on the basis of

collateral or security it offers to the institution

A)Secured Vs Unsecured line of credit

As the literal meaning suggests this type of line of credit products use collateral

while handing out of the credit limits. Further classification and description of

products have been done on this basis

1)Secured Line of Credit Products-

When any loan is secured, the financial institution has established a lien against an

asset that belongs to the borrower. This asset becomes collateral, and it can be

seized or liquidated by the lender in the event of default. Because the bank is

certain of getting its money back, a secured line of credit typically comes with a

higher credit limit and a significantly lower interest rate than an unsecured line of

credit.

One commonly-used version of a secured LOC is the home equity line of credit

(HELOC). The money is borrowed against the equity in the home.

1.1)Home Equity Line of Credit

This line of credit option takes the customer's home as collateral, and the limit is

based on the customer’s equity in the home (maximum 80% of the appraised value

less any other mortgages currently on the home). Since the value of the home is
 3

usually appreciated, the risk to the lending institution is low. Thus, this option

usually offers a lower

interest rate.

Customers are required to pay for the legal fees related to

registering their home as collateral (this is the same as a mortgage). Repay-

ment of this facility ranges from interest-only up to 3% of the outstanding

balance of the facility

Typically HELOC contracts often only require minor, interest-only payments over

the draw period, but you might be able to pay more to have it applied to the

principal. You will sometimes request an extension after the draw cycle has ended.

Otherwise, the debt will reach redemption. You won't be able to get any more

money from here on, because you'll have to make monthly principal-plus-interest

payments before the debt is paid off. After a 10-year draw period, most lenders

have a 20-year maturity period. Over the loan cycle, you must repay the whole

amount lent, plus the agreed-upon interest rate. Some lenders may offer borrowers

different types of repayment options for the repayment period.

1.1.1)How to apply for a HELOC?

A HELOC is similar to a conventional loan in terms of qualification. Lenders will

consider your credit score, down payment (if you're buying) or equity (if you

already own a home), and repayment potential.

Your credit rating is determined by two things.

To begin, your credit score is a broad representation of your creditworthiness. If

your credit score is in the mid-to-low-600s, you may not be eligible for a HELOC.

Those with credit scores of 740 or higher will have the best HELOC rates.
 4

Second, your credit background shows your lender how much you've already paid

your bills on time. You can either be approved or denied based on the frequency

and severity of late payments and other negative credit records.

, you will either have a rate adjustment or won’t qualify. (Zillow, 2018)

HELOC qualifying (and rates) are impacted by how much equity you have in your

home, assuming a maxed-out HELOC balance.

Once you Qualify There isn't much of a distinction between applying for a home

equity line of credit and a conventional mortgage.

You first locate a HELOC lender, who will either take your application orally or

instruct you to fill out an online form. All personal and contact records, including

name, phone, and email, as well as the number of children and their ages, years of

education completed, and race, may be sought by the lender.

● A minimum of two years of residency history and paperwork is needed.

● At least two years of career and salary records, with all supporting pay
stubs, and tax filing documents.

● At least two months of statements for all bank and investment accounts.
● Social security number and written authorization for the lender to pull the
credit report.
● Full documentation for life events like divorces, child support, alimony,
bankruptcies, etc.
 5

● Documentation of payments, insurance, taxes, and income for any properties

you own. (Zillow, 2018)

All of this might not be required at the first step, but it will be required

eventually.HELOCs can also include annual maintenance fees much as credit cards

do, and they can have an early closure fee for closing them in the first one to three

years.

1.1.2)Investment Secured Line of Credit(SBLOC)

Certain banks or financial institutions in Canada provide credit facilities to their

customers by using their existing investment portfolio or to be purchased financial

securities as collateral against the credit. Here to articulate this product comparison

of two leading banks have been demonstrated

A)TD Investment secured LOC.

Low-interest rate credit secured by existing or to be purchased investments.

Use your eligible investments as collateral to borrow at a lower interest rate than

an unsecured line of credit. (TD Direct, n.d.)

Benefits of this product

● Use it again
As soon as you pay any of the credit you've used, it’s available again. (TD
Direct, n.d.)
● Choose how much you repay
Interest-only payments or any amount up to the entire balance with no
prepayment charge. (TD Direct, n.d.)
 6

● Convenient Access
Access your credit through your TD Access Card2, cheques, and EasyWeb
Online banking. (TD Direct, n.d.)

B)Royal Credit Line (Backed by Securities)

Similar to the TD line this also helps customers to avail credit facility.

A Royal Credit Line could save you money and time, and help you easily manage

your credit. Here are some of the valuable benefits that you can enjoy (Royal Bank

of Canada, n.d.):

● “Everyday low rate” (Royal Bank of Canada, n.d.)

● “Save thousands of dollars a year in interest—rates are typically lower than
those offered by credit cards.” (Royal Bank of Canada, n.d.)

● No annual fee
● “Plus, there is no fee to withdraw funds and we do not charge over-limit fees
on Royal Credit Line accounts.”
● Withdraw funds at the ATM, write cheques disclaimer from your account, or
transfer money through RBC Online Banking. (Royal Bank of Canada, n.d.)
● The ability to decrease your credit limit and close your account is available
through RBC Online Banking (Royal Bank of Canada, n.d.).
● Reuse available credit
● Once you pay down your balance—no need to re-apply. (Royal Bank of
Canada, n.d.)

Flexible payment options

Make just the minimum payment, or pay more to reduce your balance. You can also

make changes to your payment account, payment amount, payment frequency, or

payment due date through RBC Online Banking.

 7

Optional

LoanProtector® life and disability or critical illness insurance provide protection for

you and your family. (Royal Bank of Canada, n.d.)

1.2.1How to apply?

The application process is almost similar to the HELOC and banks with loyal long

customers tend to be much more negotiable in interest rates and application charges.

2.)An unsecured line of credit

The lending institution assumes a greater risk in granting an unsecured line of credit.

None of the borrower's assets are subject to seizure upon default. Not surprisingly,

unsecured lines of credit are tougher to get for both businesses and individuals.

Credit cards are essentially unsecured lines of credit. (Investopedia, 2020) That's one

reason why the interest rates on them are so high. If the cardholder defaults, there's

nothing the credit card issuer can seize in compensation. Other Examples are-

2.1)Student Line of credit

A student line of credit is a product for students that helps them pay for expenses

related to post-secondary education, like tuition or books. It can also be used to

help cover everyday expenses, like food and transportation.

 8

With a line of credit, you only have to pay back the money you borrow. You also

only have to pay interest on the money that you borrow. For example, suppose

your line of credit has a $10,000 limit. You borrow $3,000. This means you only

have to pay back what you use i.e.$3000 in this case. (How to save money, 2020)

With a loan, you receive a set amount of money and have to pay it all back. You

also have to pay interest on the total amount that you receive.

Student lines of credit interest rates may be lower than those offered on

government student loans. However, when you borrow money from a student line

of credit, you'll have to start paying interest right away. You won't start paying

interest on a government student loan until you finish your program or leave

school.

A line of credit's interest rate is also determined by the prime rate, but it can be as

low as Prime – 0.25 percent in some circumstances. (How to save money, 2020)

If you speak with the bank, you may be able to work out a repayment plan and

arrange for a grace period after graduation if you are unable to pay it back in full

right away. One of the best parts about a line of credit is that if payments are made

on time, it can build your credit score.

2.1.1)How to apply?
Your line of a credit application may require a co-signer, such as a parent. If you

are unable to repay the debt, this person will be held responsible.

The maximum amount of money you can borrow will be determined by your

financial institution. The amount you can borrow is determined by the program

you're pursuing as well as the school or academic institution that offers it. Your
 9

living expenses, credit history, and ability to repay the money you borrow may all

play a role. (Financial Consumer Agency of Canada, 2019)

A student line of credit can be applied for at any time. You can usually apply

online, by phone, or in person. Find out how to apply for a student line of credit by

consulting your financial institution.

You usually need to provide proof that you’re either a full-time or part-time student

at a recognized Canadian post-secondary institution to be eligible for a student line

of credit.

2.2)RRSP Line of credit .

This facility is provided by many lending institutions in the hopes of encouraging

their customers to borrow to purchase an RRSP with them. The limit on the facility

is based on two factors: (i) how much the customer would like to contribute, and

(ii) how much the customer can afford to repay the lending institution over a short

period of time.

Some Canadians take out a RRSP line of credit to make a contribution ahead of the

yearly RRSP deadline, which can potentially give them tax savings when they get

their tax return. If you save regularly towards an RRSP contribution, this sort of

line of credit might not be something you’d consider. (Financial Consumer Agency

of Canada, 2019)

2.3)Personal Line Of credit

 10

This gives you access to unsecured funds that you can borrow, payback, and then

borrow again. A credit history free of defaults, a credit score of 680 or higher, and

consistent income are all required to open a personal line of credit. Savings and

collateral in the form of stocks can help, though a personal LOC does not require

collateral. Personal LOCs are used for a variety of reasons, including emergencies,

weddings, and other events, overdraft protection, travel and entertainment, and to

help those with irregular income smooth out the bumps. All major financial

institutions provide a Personal line of credit such as by Bank of Nova Scotia it is

known as STEP.

2.3.1)Demand Line of Credit

They can also be referred to as "Interest Only LOC." This type can be secured or

unsecured, but it's not commonly used. The lender can call the amount borrowed

due at any time with a demand LOC. Depending on the terms of the LOC,

interest-only or interest plus principal repayment can be made (until the loan is

called). At any time, the borrower can spend up to the credit limit.

How do banks remain safe and make money?

3)Line of credit insurance

Your lender may offer optional insurance for your line of credit, also known as:

● balance protection insurance

● balance insurance
● credit protection insurance (Financial Consumer Agency of Canada, 2019)
This is a type of credit and loan insurance.
 11

You don’t need to sign up for insurance to be approved on your line of credit. This

is a form of credit and loan protection.

To be approved for a line of credit, you do not need to sign up for insurance. This

type of insurance may help cover your loan payments if you are unable to make

them due to illness, accident, death, or loss of employment, up to a certain amount.

However, there are some important exclusions in the coverage provided by the line

of credit insurance. Exclusions are items that your insurance policy does not cover.

Before purchasing this insurance, read the certificate of insurance to see what's

covered and the maximum amount of your line of credit that will be covered.

(Financial Consumer Agency of Canada, 2019)

4.)How to Get The Best Rate for a Line of Credit in Canada?

So now that you know about the different types of lines of credit and what they can

be used for, let’s learn a bit more about how to get the best rate for a line of credit

in Canada. The first thing you should do is get your credit in check and have a

good credit report. These companies want to loan money to individuals with the

highest chance to pay it back, so if your credit history is fantastic, they will be

more willing to give you a better rate than if you hardly ever pay back your loans

on time. (Havervold, n.d.)

A)Improve Your Credit Repor t

This means that if your credit report isn’t great, you might want to take some

time to pay off any outstanding debts and make timely payments in order to

ensure your credit score is higher so that you are an ideal client.. After a few
 12

months of working on your credit, there is a good chance you will be able to

secure a better interest rate.

B)Choose a New Financial Institution

Also, if you are in the market to move to a new bank altogether, you should let

them know. Banks are all about making money, so if you bring them more

business in the form of your accounts and investments as well as a line of credit,

they might be willing to give you a lower interest rate to try to “warm you up”

to the idea of bringing all of your banking to their institution. (Havervold, n.d.)

C)Shop Around

Lastly, doing your research and shopping around for the best interest rate is

often a good idea as well. Not every financial institution is going to give you the

same rate, so take some time to speak to numerous different lenders and see

who can provide you with the best interest rate. (Havervold, n.d.)

4.1Loan vs. Line of Credit vs Credit Card

Loans and lines of credit are two different ways to borrow from lenders for

individuals. Approval for both loans and lines of credit (also referred to as credit

lines) are dependent on their intended purpose, a borrower's credit rating and

financial history, along with their relationship with the lender.

Loans have what's called a non-revolving credit limit, which means the

borrower only has access to the amount loaned once, where they subsequently

make principal and interest payments until the debt is paid off.
 13

A credit line, on the other hand, works in a different way. The borrower is given

a credit limit, similar to that of a credit card, and must make regular payments

that include both principal and interest to pay it off. Unlike a loan, however, the

borrower has continuous access to the funds and can use it multiple times while

the loan is active. (MAJASKI, 2020)

However, Interest on a line of credit is measured on the first day of the loan,

while interest on a credit card is calculated after a 21-day grace period. You may

also engage in loyalty plans and earn other incentives such as cashback or

insurance. The interest rate, on the other hand, is even higher than that of a line

of credit.

5)Comparisons among leading banks?

The Banking Sector in Canada operates as an Oligopoly when it comes to

lending Products The table generalizes a comparison and any expectation is

mentioned otherwise, This table operates as one diaspora on the data articulated

from the Top 5 banks in the country i.e.Bank of Montreal, Scotiabank, TD

Bank, RBC and also National Bank of Canada and HSBC, Since they have

mostly similar terms and similar renewal process (as discussed in above

subsection). The Table here shows a comparison in certain LOC

Products(primarily focusing on TD Credit Lines)

 14

Investment
Personal Home
Student Line of Secured
Line of Equity
Credit Line of
Credit FlexLine
Credit

Up to Undergraduate: Up Borrow up Based on

$50,000(in to $80,000 to 50% for your

RBC and Graduate/Profession equities home

TD)OR Up al students: Up to and stocks, value

to $75000 $325,000 in TD and 100% Generally

in scotia bank for liquid not more

Credit
bank Up to $40,000 for secured than 80%
limit
However Undergraduates in *of the of the

negotiable. scotia and up to value of equity

$50,000 in HSBC your value.

eligible

investment

s
 15

Variable Variable Rate Variable Variable

Rate depending on the Rate Rate

depending Prime rate which depending dependin

on the was 2.45% for all on the g on the

Prime rate inFixed rate can be Prime rate Prime

which was used too which was rate

Rate
2.45% for 2.45% for which

all all was

institutions institutions 2.45% for

all
Fixed-rate
institutio
can be used
ns
too

No fee No fee Registratio Set up fee

Sometimes n fees may

maintenanc be

e or an applicable

annual

Fees charge can

be levied

for eg

Scotia

Bank has

$48 for a
 16

dishonored

payment

etc

Pay as little Monthly Interest-onl Interest-o

as the interest-only y nly

minimum payments while in payments

monthly school, and 24

Minimu payment months after the

m requiremen study period ends

Payment ts as set out additional payments

in your are required.

Line of

Credit

Agreement

(TD Direct, n.d.)

 17

Bibliography

Financial Consumer Agency of Canada. (2019, March 21). Line of Credit.

Government of Canada.

https://www.canada.ca/en/financial-consumer-agency/services/loans/loans-li

nes-credit.html#toc2

Havervold, K. (n.d.). How to Get The Best Rate for a Line of Credit in Canada.

Loans Canada.

https://loanscanada.ca/money/get-best-rate-line-credit-canada/

How To Save Money. (2020, 11 3). Should You Get A Student Loan, Line Of

Credit, Or Credit Card? How To Save Money.

https://www.howtosavemoney.ca/student-loan-line-of-credit-card#student-li

ne-of-credit-interest-rate

How to save money. (2020, November 03). Should You Get A Student Loan, Line

Of Credit, Or Credit Card? How to save money.

https://www.howtosavemoney.ca/student-loan-line-of-credit-card#student-li

ne-of-credit-interest-rate

Investopedia. (2020, May 27). Secured vs. Unsecured Lines of Credit: What's the

Difference? Investopedia.

https://www.investopedia.com/ask/answers/110614/whats-difference-betwee

n-secured-line-credit-and-unsecured-line-credit.asp

MAJASKI, C. (2020, September 1). Loan vs. Line of Credit: What's the

Difference? Investopedia.
 18

https://www.investopedia.com/ask/answers/110614/what-difference-between

-loan-and-line-credit.asp#:~:text=%20Loan%20vs.%20Line%20of%20Cred

it%3A%20What%27s%20the,for%20a%20line%20of%20credit%2C%20the

...%20More%20

Royal Bank of Canada. (n.d.). Line of Credit (Royal Credit Line®). Royal Bank.

https://www.rbcroyalbank.com/personal-loans/line-of-credit.html

TD Direct. (n.d.).

https://www.td.com/ca/en/personal-banking/products/borrowing/lines-of-cre

dit/investment-secured-line-of-credit/. TD.

https://www.td.com/ca/en/personal-banking/products/borrowing/lines-of-cre

dit/investment-secured-line-of-credit/

Thakur, M. (2017, January 31). Line of Credit. Wall Street Mojo.

https://www.wallstreetmojo.com/line-of-credit/

Zillow. (2018, July 18). How to Get a HELOC. Zillow.

https://www.zillow.com/mortgage-learning/how-to-get-a-heloc/