The line of credit, like the credit card, is a revolving credit. Its holder must pay his margin to be entitled to a new loan, the limit of which is established by the lending institution. Margin repayment terms are similar to those of a credit card cash advance. The interest which begins to accrue on the first day of the loan is payable at the end of the month. However, no monthly service fees are charged, so much so that some even use their margin as their only bank account.
THE MARGIN: AN ASSET TO BE NEGOTIATED
A point in favor of the margin: its interest rate is much more advantageous than that of a credit card. “This rate can be as low as the preferred rate, ie the prime rate plus a percentage added by the bank,” explains Daniel Plouffe, financial planner registered with the Institut québécois de planification financière. The rate is also negotiable and depends on the length of the relationship maintained with the financial institution and the number of products or investments held with it.
TRANSFER CREDIT CARD BALANCE INTO MARGIN
The credit card is an attractive instrument for everyday purchases, provided you pay the full balance each month. Indeed, interest rates from credit cards or department stores can reach 18% or more. But if the consumer is unable to pay the balance, then the line of credit can take over.
“A smart consumer makes all his purchases on the credit card. His purchases are thus protected, both on the Internet and in various stores, and he receives bonus or travel points for each transaction. But if he is unable to pay his balance, he must empty his card and transfer the balance to a line of credit, whose interest rates are lower,” says Daniel Plouffe.
According to him, the line of credit is part of good asset management planning. Its interest rate is generally more advantageous than that of a car loan or a mortgage loan. On some occasions, it even makes sense to transfer one’s debts to the margin. But beware! Personal discipline is required to avoid runaway accounts.
BE CAREFUL, THIS MONEY DOES NOT BELONG TO YOU!
“The danger is to imagine that this money belongs to us. If this financial tool makes it possible to never run out of cash, it can however become a drag if the interest is left to drag on, ”warns Daniel Plouffe. In effect, the unpaid interest accumulates in the capital, becomes compound interest and rapidly increases the size of the loan.
THE MARGIN: A BRAKE ON BORROWING?
In finance, the line of credit is considered a liability on the personal balance sheet. It is therefore added to the calculation of debt ratios. Thus, the higher the limit of the line of credit, the more it becomes a brake on borrowing. “It is advisable to limit your personal consumption and, consequently, your line of credit by doing good budget management,” recommends Daniel Plouffe.
As competition remains fierce between banking institutions, it is possible that the limit of the line of credit granted by a bank is too high for your needs. In fact, the sums advanced can exceed $25,000 in several institutions. It is better then to reduce the limit of your margin in order to ensure that you maintain your borrowing capacity at its highest level for a long time.