The advantages of a LOC over a Chequing account
Unfortunately, I only know this applies to CIBC, TD, Scotiabank and PCF. I'm not sure about BMO and RBC is a definite no.
1. Free transactions: That's right, you can get unlimited transactions at a B&M bank. You can put the LOC on the Chequing or Savings button and use it at the ATM like you would any Chequing account. You can use debit (I don't advocate this), pay bills, receive and send preauthorized payments, write cheques, send EMTs, get money orders all from this account like any chequing account. All for no monthly fee.
2. Free Cheques: If you're with PCF this is not an issue. But if you're with a B&M bank, you will easily pay $35 for 100 cheques. Again, cheques are totally free with the LOC at CIBC, TD and Scotiabank. They look exactly like regular cheques, there is nothing there to indicate it was from a LOC account. CIBC sends you 20 duplicates at a time which I think is good as I don't need to use cheques too often.
3. Cheap Overdraft: This is one of the biggest advantages as well. For a regular bank account, you are paying upwards of 19% interest when you use your overdraft. You probably also pay a per-item fee or monthly fee to have the privilege of using money at 19%. If you have tight cashflow, and don't keep much in your Chequing account, $5 fees will add up over time (but it's still cheaper than NSF). When you go "overdraft" with the LOC, you pay nothing but the interest (which is P+X) and no per-item fee.
4. Better holding terms: If your deposit hold limits are not that good because you are a new customer, LOC is also a great way to get around those holds. You will have access to whatever your credit limit is immediately (let's say $20,000) and you have a $20,000 cheque to deposit but you want to use it right away and can't wait 5 days. If the bank holds all your deposit, you can just deposit the cheque into the LOC and transfer the money back out immediately. What you have just done is replace the credit limit with a held cheque, you have not borrowed any money, but your available balance in the LOC will be $0 until your cheque clears a few days later. Not to mention if the cheque is bad, it reverses inside the LOC and your account will be -$20,000 but that's okay with the bank as it will be like you borrowed $20K for the few days and you only pay the interest rate on your LOC. With a regular chequing account if the cheque goes bad your account goes into unauthorized overdraft and you are paying 19% interest. Even if your deposit holding limits are high, depositing to LOC will leave you a lot less liable for depositing bad cheques.
Of course there are some limitations:
- Not everyone can get a LOC, if you do not have the income nor credit score
- If you go to the teller, they may not like seeing the LOC in a positive balance (TD sometimes is not cool with this, but CIBC is)
- If you plan to use it as a chequing account with a positive balance and not borrow any money from it, the interest rate does not matter. It's only when you use the "overdraft" will the rate matter but it will always end up cheaper than your regular bank account.