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How to get a line of credit in Canada

A line of credit is one of the most flexible and popular of all loan options in Canada. Over three million Canadians have a home equity line of credit – and this doesn’t include personal lines of credit.

Lines of credit are so popular because they allow you to borrow any amount of money up to the line of credit limit (which is set by your financial institution), and you can use the money for any purpose. Similar to the credit limit you might have with a credit card, when you pay off an amount, that cash becomes available for you to withdraw again.

You only pay interest on the amount that you actually borrow, not the amount of the full line of credit limit, and lines of credit usually have lower interest rates than credit cards (often much lower interest rates).

Getting a line of credit is not always a simple matter, however. We explore how to get a line of credit in Canada, including: line of credit qualifications; how to get a pre-approved line of credit; line of credit requirements; and how to get approved for a line of credit.

How to qualify for a line of credit

When you first start looking into how to get a line of credit in Canada, there are a number of aspects of your financial life that lenders will want to know. Line of credit eligibility is all about proving your ability to manage (and ultimately pay off) the debt.

When you’re wondering what you need to get a line of credit, most lenders’ line of credit requirements requires you to provide the following information:

  • Proof of your income (this could include pay stubs, T4s, a letter of employment, etc.)
  • Your credit report (lenders will pull this once they have your permission)
  • Details of all of your other outstanding debt

Let’s take a closer look at each of these.

When it comes to income, what do I need to get a line of credit?

Line of credit eligibility will require you to prove that you have sufficient income to be able to:

  1. Pay the monthly interest (which is the minimum payment)
  2. Eventually pay back the whole amount owed

Your income will determine the size of the line of credit offered to you. Typically, when you’re going through the process of how to qualify for a line of credit, if you have a high income, you’ll be offered a higher line of credit limit. Some financial institutions have line of credit eligibility rules that mean that they might reject your application completely if you have very low income.

With regards my credit score, what do I need to get a line of credit?

One of the most important aspects of how to get approved for a line of credit is having a good credit score. Some banks have really strict line of credit requirements that involve you having a good credit score to qualify. A good credit score is typically above 670 (though lenders’ line of credit requirements can vary somewhat on this score). The better your credit score, the better your line of credit interest rate is likely to be.

Borrowers who are looking at how to qualify for a line of credit when they only have a fair credit rating (usually in the range between 580-669) may struggle to find a lender willing to offer them a line of credit. If they do find a lender willing to provide them with a line of credit, they will probably have to pay a high rate of interest.

How to get a line of credit in Canada if you have a poor credit score (below 580)

Not many mainstream lenders will consider you for any type of loan with such a low credit rating. However, you can work towards improving your credit score by paying every bill promptly and keeping your credit card balances at no more than 25% of their credit limit. Once your credit rating has risen to fair, getting a line of credit should be possible.

When it comes to my other debts, what do I need to get a line of credit?

With regards to line of credit qualifications, your debt load typically has a direct bearing on the size of your line of credit. This is particularly the case when looking at how to get approved for a home equity line of credit (HELOC). Because a HELOC is secured against your home, you would qualify based on your debt service ratios (which compare your monthly income to your monthly outgoings, including debt obligations).

If your current debt obligations account for a high percentage of your income on a monthly basis, your line of credit limit will probably be pretty low. If you have few debts, your line of credit limit could be much higher.

Line of credit eligibility: the bottom line

If you have a high credit score, high income and low debts, you’ll likely qualify for a large line of credit at a low interest rate.

If you have a low credit score, low income and high debt, you will probably not qualify for a line of credit.

Anywhere in between would qualify for various line of credit limits, at varying interest rates.

How do you choose the best line of credit for you?

When you’re looking at how to get approved for a line of credit, it pays to know the different options available. Line of credit qualifications vary depending on the type of loan, so it helps to know what to expect.

What do you need to get a line of credit that is unsecured?

Unsecured, or personal lines of credit, are considered the riskiest, as there is no security against defaulting on the loan. You would need a good credit score and decent income level but be prepared for interest rates at the higher end of the spectrum.

What do you need to get a line of credit that is secured?

Lines of credit that are secured against an asset, such as a car, jewellery or an investment, are usually easier to get, because it is a more guaranteed way for the lender to get their money back if you default. Interest rates are usually lower and credit limits higher.

What do you need to get a line of credit that is secured against your home?

Home equity lines of credit have probably the most rigid line of credit qualifications, insofar as you need to provide a lot of supporting documentation, plus a lawyer typically needs to be involved.

However, if you have a decent credit rating, adequate equity and good debt service ratios, this is the best line of credit option available: you can typically borrow very large sums of money at very low interest rates. And, if you’re arranging a pre-approved mortgage, you may also be able to arrange a pre-approved line of credit at the same time.

It’s important to know that how to qualify for a line of credit secured against your home is often the longest, and in some ways, most difficult process, but it’s usually well worth it. It can save you a lot of money in interest, especially compared to unsecured lines of credit.

A good alternative to a line of credit

Now you know the answer to the question, “What do I need to get a line of credit,” it’s worth considering the alternatives.

If you’re a Canadian homeowner aged 55-plus, a CHIP Reverse Mortgage from HomeEquity Bank could be an excellent alternative to a line of credit — even a HELOC. These are some of the advantages of a reverse mortgage over a HELOC:

  • It can be easier to qualify: neither your income nor your credit score are qualifying factors.
  • You don’t have to make minimum payments: in fact, you don’t have to make any regular mortgage payments at all, so it won’t impact your retirement income.
  • You only have to pay back what you owe when you move out or sell your home.

Contact us today at 1-866-522-2447 to find out how much tax-free cash you could borrow as an alternative to taking out a line of credit.