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Before approaching the concept of personal line of credit, it is a good idea to establish the difference between a personal loan and a personal line of credit. Notably, they can be used for the same purpose. However, there are some contrasts. For instance, loans may be extended to consolidate debt, while lines of credit are intended to help clients whose monthly income is not sufficient or stable.

Personal credit line is good for reducing monthly payments into one payment with a low interest rate. Moreover, only the amount you need can be borrowed, and you are not required to apply again over the credit line’s term. You can go online or call to inquire how much credit you have. The principal amount can be repaid any time over the credit line’s term and in some cases, variable rate applies which is lower compared to the interest rate on loans. However, in some cases the revolving line of credit just adds to the bills you are paying already. This is where we come into liquidity problems – the credit line itself is one. This is why it is important to use personal lines of credit wisely. If you want to purchase some expensive item, which you don’t need, you should not buy it using a credit line. A line of credit is good to use when you face a cash emergency.

A personal credit line is simply a replacement for emergency funds, according to experts. What is more, personal credit lines have some disadvantages. While the rate of interest may be lower with a personal line of credit, it is quite high than with a HELOC. Moreover, lenders are becoming more cautious about issuing new personal credit line. Personal credit lines are easy to access once you have been approved, which tends to lead people into the temptation of borrowing too much money. People borrow money from their personal lines of credit for things they could save money for, such as furniture, car repair, insurance and education costs. However, most Canadians with personal lines of credit use them to consolidate debt, cover medical costs, make home improvements or buy used cars. They usually pay back the money within a year or so. In Canada, as other places, personal lines of credit have become more popular compared to HELOCs.

In terms of liquidity problems, risk-based pricing is another problem when determining interest rates. Some financial institutions do not use this factor, for example, certain credit unions do not factor it in. This means the interest is a bit lower (around 10 percent) if the payment is automatically deducted from the client’s paycheck or account and slightly higher (around 11 percent) if another method is used to make payments.

Other establishments use risk-based pricing, which means the interest rates vary considerably – from 9 percent to 18 percent.