Lines of Credit - Tilted Forum Project Discussion Community

Yakk · 07-20-2005, 10:38 AM

So, I just got a line of credit. (btw, potential debt is scary)

I got it for somewhat strange reasons[1], but that isn't all that important.

The strange thing is that this beast has a minimium monthly payment.

In case "line of credit" means something different to different countries, here is what it means here:

You basically get a bank account that can run into a negative balance. It has a floating interest rate based off the banks "prime lending rate" (which is roughly based off the Bank of Canada's lending rate).

If you take money out of the account, you get charged interest on it starting the moment the money comes out. The rate tends to be much lower than a credit card[2], but there is no grace period.

You can take money out and put money into the line of credit at will.

The strange thing is, it has a minimium payment. 3% of the balance or 60$, whichever is greater. It gets automatically removed from my chequing account (on a day of the month of my choosing) if I haven't payed at least this much in the previous month.

Now, this doesn't make much sense to me. Because, really, you can simply withdraw that much money from your line of credit, then pay the minimium monthly payment with it.

I suppose this has some advantages for the bank: if you ignore the line of credit, it rapidly evapourates instead of building up until you are forced to declare bankruptcy. It also gives the bank an early warning if you can't manage your finances (even in the really simple step of "take money out then put it back in to pay your minimium payment").

But still, this seems pretty ridiculous.

Can someone explain why in the world such a line of credit would have a minimium payment?

Footnotes:
[1] I don't intend on using it. But a line of credit gives me liquidity, so I can make the rest of my assets less liquid without costing me flexibility.

[2] Rate comparison:
"Prime" Rate: currently 4.25%. (means "best rate they will lend at" in theory, but is a lie, somewhat.)

Credit card rate: 10% to 20%+ over prime.

Unsecured line of credit rate: 1.5% to 5%+ over prime.

Morgage rates: 5 year floating rates are around Prime. (30 year morgages are uncommon in Canada)

Car loan rates: Best I've seen was 0.75% over Prime.

07-20-2005, 10:38 AM	#1 (permalink)
Yakk Wehret Den Anfängen! Location: Ontario, Canada	Lines of Credit So, I just got a line of credit. (btw, potential debt is scary) I got it for somewhat strange reasons[1], but that isn't all that important. The strange thing is that this beast has a minimium monthly payment. In case "line of credit" means something different to different countries, here is what it means here: You basically get a bank account that can run into a negative balance. It has a floating interest rate based off the banks "prime lending rate" (which is roughly based off the Bank of Canada's lending rate). If you take money out of the account, you get charged interest on it starting the moment the money comes out. The rate tends to be much lower than a credit card[2], but there is no grace period. You can take money out and put money into the line of credit at will. The strange thing is, it has a minimium payment. 3% of the balance or 60$, whichever is greater. It gets automatically removed from my chequing account (on a day of the month of my choosing) if I haven't payed at least this much in the previous month. Now, this doesn't make much sense to me. Because, really, you can simply withdraw that much money from your line of credit, then pay the minimium monthly payment with it. I suppose this has some advantages for the bank: if you ignore the line of credit, it rapidly evapourates instead of building up until you are forced to declare bankruptcy. It also gives the bank an early warning if you can't manage your finances (even in the really simple step of "take money out then put it back in to pay your minimium payment"). But still, this seems pretty ridiculous. Can someone explain why in the world such a line of credit would have a minimium payment? Footnotes: [1] I don't intend on using it. But a line of credit gives me liquidity, so I can make the rest of my assets less liquid without costing me flexibility. [2] Rate comparison: "Prime" Rate: currently 4.25%. (means "best rate they will lend at" in theory, but is a lie, somewhat.) Credit card rate: 10% to 20%+ over prime. Unsecured line of credit rate: 1.5% to 5%+ over prime. Morgage rates: 5 year floating rates are around Prime. (30 year morgages are uncommon in Canada) Car loan rates: Best I've seen was 0.75% over Prime. __________________ Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.