Anytime you ask a financial institution for funds, it can be intimidating and embarrassing if you don't have a clear picture of what your finances look like. Knowledge is power and informing yourself on what the process will look like for you is the first step towards getting approved for a loan or a line of credit.
What is the difference between a loan and a line of credit?
While loans and lines of credit can be used to purchase many of the same things, there are some differences in how they are structured and how you pay them back. A loan is straight forward. You borrow money from a lending institution and you are expected to pay it back, with interest, by a certain date. A line of credit is a bit more nuanced.
A line of credit is more like a bank account, there is a defined credit limit, but it's very accessible, like an extension of your chequing account. There is no repayment deadline with a line of credit, however, there still are minimum monthly payments. The only fee you’re on the hook for is interest on the amount you have taken from the account. Lines of credit usually have variable interest rates.
How to qualify
Loans and lines of credit function differently but they are similar when it comes to what you need to qualify.
Banks require you to have a good enough income to guarantee you’ll be able to pay back any borrowed funds. In Canada, it is unlikely you will qualify for a line of credit until your household income is at least $35,000.
Healthy credit report
It's a financial chicken and egg situation - you need to borrow money to prove you’re a reliable borrower and build your credit score but you can't do that unless you can borrow some money. If you haven’t used a lot of credit in your life, now is the time to get a credit card and start purchasing and paying down your card to establish your credit history. If your credit has taken a hit in recent years, go over your credit report and make sure everything is accurate. If your debt-to-income ratio is too high, you may have to pay down your existing debt before you’ll qualify for any additional credit.
If you still have a low credit score even after reducing your debt, review your official credit report from Equifax and Transunion and examine the details. You can dispute any errors that you find.
Lending institutions have different criteria for what they consider reliable employment history. If you’re self-employed or have suffered a job loss over the last number of years, you may have tougher time qualifying for a loan over someone who can prove ongoing, full-time employment. Even if you’ve had a less stable employment history, you can often still qualify for a loan, however you may have to offer some collateral for a secured loan and pay a higher interest rate to qualify.
We understand that life is filled with unexpected events that impact even the best laid plans and sometimes you need access to money to help you make a purchase or consolidate debt. If you’re unsure of what loan option you might qualify for, give us a call.
We’re here to help.