What Is a Line of Credit?

A line of credit is a type of loan that lets you borrow money up to an approved limit.

You can use as much or as little as you need and generally pay interest only on the amount you borrow.

As you repay the balance, that credit becomes available to use again.

KOHO Cash Advance

KOHO Cover is not a traditional payday loan. It is a cash advance designed for Canadians who need a smaller amount of money to cover short term expenses.

With KOHO Cash Advance, you can:

• Get up to $250 as an instant cash advance (amount depends on eligibility)

• Pay no interest on the advance

• Avoid a credit check

• Repay automatically once you add money or get paid

You subscribe to the Cover bundle for a low monthly fee, and in return you get the advance feature plus extras like a credit report, financial coaching, and priority support.

How Does a Line of Credit Work?

A lender approves you for a maximum credit limit.

For example, if you have a $10,000 line of credit and borrow $3,000, you generally pay interest on the $3,000 rather than the full $10,000.

If you repay $1,000, that amount becomes available to borrow again.

This is why a line of credit is considered revolving credit.

How Does Interest Work on a Line of Credit?

Interest usually starts from the day you borrow the money and continues until you repay it.

Most lines of credit have variable interest rates. This means your rate can increase or decrease over time.

Your rate may depend on factors such as:

• Your credit score

• Your income

• Your existing debt

• Whether the line of credit is secured

How Do You Repay a Line of Credit?

You receive a statement showing your outstanding balance and minimum payment.

You must make at least the minimum payment each month.

Some minimum payments may cover mainly interest. If you only pay the interest, your original balance will not decrease.

Paying more than the minimum can help you repay the debt faster and reduce your total interest cost.

What Are the Different Types of Lines of Credit?

Common types include:

Personal line of credit

An unsecured line of credit that can be used for expenses such as emergencies, renovations or debt consolidation.

Secured line of credit

A line of credit backed by an asset.

Because the lender has collateral, secured lines of credit may offer lower interest rates.

Home equity line of credit

A HELOC uses your home as collateral and allows you to borrow against some of your home equity.

Student line of credit

A student line of credit is designed to help cover education and living expenses while attending post-secondary school.

Line of Credit vs. Personal Loan

A personal loan usually gives you a fixed amount of money upfront.

You repay that amount through scheduled payments over a set period.

A line of credit is more flexible. You borrow only what you need and can reuse the credit as you repay it.

A personal loan may make more sense when you know exactly how much you need.

A line of credit may be better when expenses are unpredictable or happen over time.

What Are the Advantages of a Line of Credit?

A line of credit can offer:

• Flexible borrowing

• Reusable credit

• Interest charged only on what you use

• Potentially lower rates than some credit cards

• Access to money without applying for a new loan each time

What Are the Risks?

The flexibility can also make it easy to stay in debt.

Potential drawbacks include:

• Variable interest rates

• Minimum payments that reduce debt slowly

• Easy access that can encourage overspending

• Possible fees

• Credit score damage from missed payments

If interest rates rise, the cost of carrying a balance can also increase.

Is a Line of Credit a Good Idea?

A line of credit can be useful when you need flexible access to money and have a clear plan to repay what you borrow.

It may work well for irregular expenses or temporary financial needs.

The important thing is to treat the available limit as borrowed money rather than extra income. Compare the interest rate and fees before using it, and try to pay more than the minimum whenever possible.