2022-04-07T17:14:47-04:00April 7th, 2022|

Lines of credit in Canada: What newcomers need to know

The Canadian economy is credit-based and financial institutions offer a wide range of credit products that people can use for different financial needs. As a newcomer, your first credit product will likely be a credit card, which gives you access to a relatively small credit limit and allows you to start building your credit history in Canada.

However, as you settle down, your financial goals and needs will evolve and a credit card may not be enough. While loans and mortgages are popular options if you need funds for a specific purpose, such as to buy a car or home, a line of credit gives you the freedom to use credit for a variety of expenses. In this article, we talk about what a line of credit is, the types of lines of credit, and why it may be beneficial for newcomers to apply for a line of credit.

In this article:

What is a line of credit?

A line of credit is a financial product where you get approved for a predetermined amount, also known as a credit limit. You can then use as much or as little of your limit as you wish, depending on your needs at the time.

As a newcomer to Canada, there may be instances where you need to borrow money for unexpected or irregular expenses, like purchasing furniture or putting a down payment on a car

Many new permanent residents also choose to study in Canada to improve their career prospects. In such a case, you can use a line of credit to pay for your living expenses while you study, and repay the amount when you find employment after you graduate. Having a line of credit allows you to borrow funds when you require them and repay the balance at your convenience. 

How does a line of credit work?

A line of credit gives you ready access to funds when you need them. In a way, it works like a credit card, which gives you a maximum borrowing limit. You can then use as much or as little of your credit limit for any purpose. Moreover, a line of credit is revolving credit, which means you can borrow from it and repay the balance repeatedly, without having to reapply.

You pay interest on the amount you use from your line of credit, but this interest is typically much lower than that of a credit card. Most lines of credit have a variable rate of interest, which means the interest you pay will vary over time.

One of the key advantages of a line of credit is that it gives you the flexibility to pay off your debt at any time. However, you need to pay at least a certain minimum amount—usually the interest for the period—every month.

Can you withdraw cash from a line of credit?

Similar to a bank account, you can access funds from your line of credit in several different ways. You can withdraw cash from your line of credit through your bank’s Automated Teller Machine (ATM). Alternatively, you can write cheques or make online transfers from your line of credit to transfer funds to yourself or other parties.

Lines of credit vs. loans

A line of credit is different from a loan in many ways. While both products are types of credit, knowing how they differ can help you choose the right option for your situation.

Line of credit Loan
A line of credit is revolving credit. You get approved for a credit limit that you can borrow against. When you repay all or part of your debt, that portion of the credit limit becomes available to you again. 

For example, you have a line of credit for $5,000, spend $2,000 (which you pay interest on), and repay $1,000: you now still have $4,000 which you can use.

A loan is a non-revolving form of credit. This means you receive the entire amount upfront and continue to make payments until the debt and interest are fully paid off.

For example, you take a loan for $5,000. You receive the $5,000 in full in your account. Even if you spend only $2,000, you must pay interest on the full $5,000.

You can use as much or as little of your credit limit as you need. You only pay interest on the amount you use. You receive the entire amount upfront and must pay interest on it, whether you use it or not.
No fixed payment schedule. You usually have to pay monthly interest, but can pay back the principal at your convenience. There is usually a fixed payment schedule, such as monthly or bi-weekly payments that include a portion of the principal and some interest.
Lines of credit usually have variable interest rates. Loans can have fixed or variable interest rates.
Ideal if you want the flexibility to borrow for various financial needs. Ideal if you have a specific borrowing need with a time frame for repayment, such as financing a car.
You can use, repay, reuse, and repeat, without having to reapply. After repayment, if you need more credit, you’ll have to apply for another loan.

Secured versus unsecured lines of credit

In Canada, you have the option of choosing between a secured or unsecured line of credit. These products vary in terms of credit limits, interest rates, and qualification requirements. 

What is a secured line of credit?

A secured line of credit requires some collateral as security. This could be equity in your home or other property or your investment portfolio. In most cases, it takes newcomers a few years to build or buy an asset, so this option may not be immediately available to you when you arrive in Canada.

A secured line of credit typically gives you access to a larger credit limit at a lower interest rate compared to a credit card. For instance, if you’re a homeowner, you may qualify for RBC’s secured Royal Credit Line with a credit limit as high as 65 per cent of the current value of your equity in the home.

What is an unsecured line of credit?

An unsecured line of credit does not require collateral or security. The financial institution will calculate your credit limit based on your credit history and overall financial position. 

Since it takes newcomers a few years to build a good credit score, you may initially qualify for a smaller credit limit for an unsecured credit line. The interest rates for unsecured lines of credit are usually higher than those for secured lines of credit, but still considerably lower than a credit card. 

Types of lines of credit in Canada 

There are several types of lines of credit you can apply for in Canada, depending on your situation and financial requirements.

Personal line of credit

This is a secured or unsecured line of credit that gives you a credit limit you can use for ongoing or unexpected personal expenses. There are no restrictions on how you use the money, as long as you pay interest on the amount you use. 

As a newcomer, a personal line of credit may be useful for paying down high-interest debt, such as credit card bills, or for large expenses, such as buying a car or putting a down payment on your first home. You can even use a personal line of credit to cover any emergency expenses that may arise or if you urgently need to send money back home.

Home Equity Line of Credit (HELOC)

A HELOC is a secured line of credit granted against your equity in your home. Since property prices in Canada are quite high, most newcomers get a mortgage to buy a home. As a result, your equity will grow slowly, and you’ll only own the home outright once you’ve completely paid off your mortgage.

When you apply for a Home Equity Line of Credit, the financial institution will calculate the current value of your home minus your outstanding mortgage balance to estimate your equity. Your equity will then be used as collateral for a HELOC and your credit limit will be determined by the value of your equity.

Although different financial institutions have varying requirements, you must typically own at least 25 to 35 per cent equity in your home to qualify for a HELOC. With a HELOC, you can get a large credit limit at a relatively low interest rate. 

While there are no restrictions on how you use this line of credit, many newcomers use HELOCs to start a business, buy a car, consolidate debt, fund their children’s education, renovate their home, or even buy a second home.

Student line of credit

Important:
Most Canadian banks only provide student lines of credit to Canadian citizens or permanent residents. International students or other temporary residents usually do not qualify for lines of credit.

If you’re a permanent resident planning to pursue further education in Canada, you may be eligible for a student line of credit. A student line of credit works differently compared to other lines of credit. It is a flexible, low-cost way to borrow money for your education, but you typically need to start repaying the amount you borrow within a given period after you graduate. 

Unlike a student loan, where you pay interest on the entire amount, a student line of credit allows you to use as much or as little of your credit limit as you require, and only pay interest on what you use.

The credit limit you can get usually depends on the study program you’re enrolled in. For instance, RBC offers three types of student lines of credit, for students enrolled in post-secondary school (undergraduate and graduate programs, college or trade school), students in professional study programs, and medical and dental students

Business line of credit or business operating line

A business line of credit, also known as a business operating line, can help business owners supplement their working capital and access funds to grow their business. Businesses often have irregular cash flow and expenses; a line of credit can help cover gaps in operating funds. 

Most business lines of credit allow for automatic fund transfers to your business operating account to cover shortfalls. Some banks, like RBC, also offer two-way revolving credit lines, which automatically deposit funds into your operating account when the balance falls below a certain threshold and transfers surplus funds back to pay your principal.

Advantages of getting a line of credit as a newcomer in Canada

  • Ready access to credit: Newcomers are often reluctant to take credit unless there’s an immediate need. However, when a sudden financial need arises (such as an emergency), it’s often difficult to get credit immediately. A line of credit gives you ready access to credit when you need it and you only pay interest on the amount you use.
  • Lower interest rates compared to credit cards: Lines of credit have significantly lower interest rates than credit cards. With the interest rate differential, it may even make financial sense to use your line of credit to pay down credit card debt.
  • Revolving credit limit: With a line of credit, you have the flexibility to use the amount you need, pay down your balance, and keep reusing your available credit limit. You don’t need to reapply every time you require credit.
  • No fixed repayment timeline, except for student lines of credit: You can repay your line of credit balance at any time and there’s usually no fixed payment schedule. This means you don’t need to worry about making monthly payments and can pay off your debt when you have funds available.
  • Ease of use: Like with a bank account, you can use the funds from your line of credit in several different ways, including Automated Teller Machine (ATM) withdrawals, through cheques or online transfers.
  • No annual fee: Most Canadian banks don’t charge an annual fee for lines of credit, so the only extra cost is the interest on the amounts you use.
  • Diversifies your credit mix: Using a variety of credit products can help you improve your credit score, provided you don’t miss your regular payments.

How does a line of credit affect your credit score?

Getting a line of credit can positively impact your credit score. A line of credit allows you to diversify your credit mix and gives you access to a higher total credit limit. As long as your spending behaviour doesn’t change significantly and your overall credit utilization ratio remains low, your credit limit will improve, provided you pay off your debt on time.

Tips IconTip:
You should ideally keep your credit utilization ratio under 35 per cent of your total credit limit. If you have a credit card with a credit limit of $3,000 and a line of credit for $10,000, you can use up to $4,550 at a given time without harming your credit score.

Do I need a line of credit if I already have a credit card?

Many newcomers start building their credit history in Canada with a credit card and later apply for a line of credit. Lines of credit typically have higher credit limits and considerably lower interest rates than credit cards. You can use a line of credit for larger regular or unexpected expenses, which are more than your credit card limit or which you’re unlikely to repay within a month. 

Moreover, having both of these credit products gives you access to a higher combined credit limit, which can lower your overall credit utilization ratio and help you improve your credit score over time.

How do I apply for a line of credit in Canada?

As a newcomer in Canada, you’ll need to build a good credit history or purchase an asset you can use as collateral before you can qualify for a line of credit. Once you’ve established a good financial position, you can apply for a line of credit with a bank, credit union, or other financial institution. You can speak to a financial advisor for guidance in choosing a line of credit that best suits your needs.

Typically, the bank or financial institution will run a credit check and ask you for certain documents before approving your line of credit application. The documentation required varies based on the type of line of credit you apply for.

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How can I apply for a personal line of credit?

For a personal line of credit, you may be asked to submit the following: 

  • Identity documentation, such as your driver’s license, PR card, or passport.
  • Proof of your household income, such as salary slips or tax documents.
  • Documentation on existing debt, such as credit card statements, loan or mortgage records.
  • Proof of the value of your collateral, if you apply for a secured line of credit.

In some cases, your bank or financial institution may pre-approve you for a personal line of credit, without asking for additional documentation. Such decisions are based on your existing banking relationship with the institution, your financial position, as well as your credit and payment history.

How can I apply for a HELOC?

To apply for a Home Equity Line of Credit, you’ll usually need to submit:

  • Identity documentation.
  • Homeownership documentation, such as the purchase agreement, proof of land transfer, or title document.
  • An assessment of the current valuation of your home. In some cases, the financial institution may want to do its own assessment of the value of your asset.
  • Your mortgage documents.

How can I apply for a student line of credit?

For a student line of credit, you’ll need to provide the financial institution with the following: 

  • Identity proof.
  • Proof of your enrollment in a Canadian post-secondary institution.
  • Proof of your education cost estimate, including tuition and living expenses. 
  • Proof of your financial resources, including RESPs, scholarships, funding, or part-time income.
  • Proof of your citizenship or permanent residence status in Canada.
  • A co-signer, if needed.

How can I apply for a business operating line?

To apply for a business line of credit, you’ll need to provide the following documents:

  • Identity proof.
  • Proof of business ownership or investment in the business.
  • Your business plan.
  • The business’ financial documents showing positive revenue for the past one or two years.
  • Your personal financial documents and credit history.

As a newcomer, a line of credit can be useful in situations where you need to make unexpected or large expenses or even to pay down high-interest debt. Canadian financial institutions offer different types of LOCs and a financial advisor can help you select the right one for your needs. As long as you’re able to make timely repayments, getting a line of credit can help improve your credit mix and credit score. However, be wary of taking on credit you cannot repay, as the interest can quickly add up and adversely impact your financial situation.

Arrive is powered by RBC Ventures Inc, a subsidiary of Royal Bank of Canada. In collaboration with RBC, Arrive is dedicated to helping newcomers achieve their life, career, and financial goals in Canada. An important part of establishing your financial life in Canada is finding the right partner to invest in your financial success. RBC is the largest bank in Canada* and here to be your partner in all of your financial needs. RBC supports Arrive, and with a 150-year commitment to newcomer success in Canada, RBC goes the extra mile in support and funding to ensure that the Arrive newcomer platform is free to all. 

* Based on market capitalization