Personal Finance

My Bank Gave Me A LOC Today...Im Not Impressed

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  • Jan 21st, 2014 12:08 pm
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Oct 19, 2012
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My Bank Gave Me A LOC Today...Im Not Impressed

I was pre-approved for $10,000 line of credit at my bank so I said what the hell and signed for it to take it. But Im not impressed. I got it at 5.4% but what I dont like is the payment method.

Lets say that I use $7,000 to buy a motorcycle, at 5.4 that would be $384 interest in a year. That doesnt sound bad but thats not the way it works. My payment would be more than $500 monthly and its an obligatory payment, I always assumed that I would not have to make a payment monthly but could just pay off the money in one lump sum + the $384 in interests.

I should just finance the motorycle from the dealership in this scenario. Btw there would be a $35 late charge if I dont pay my LOC monthly payment on the day indicated.
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LOC's generally require the minimum payment be made every month in order for the lender to be certain that you're still alive. Even though, in most cases, you certainly can withdraw, say, $500 from the LOC, and turn around and use that $500 to make the LOC payment.

As long as you can manage your cashflow, I would urge you to focus on the interest expense, rather than the size of the payments themselves.

Of course any default on any loan is going to have consequences. Whether it be an instalment loan with a dealership, or a line of credit with a bank. A late payment is a default in your legal obligations to the lender.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Aug 2, 2001
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It sounds like you are having issues with the LOC having a mandatory minimum payment that may be above the interest owed for a given month?

You may want to look around at other lenders. At least with secured lines of credit you are able to make interest only payments, so you can always look into getting a secured line of credit for these sort of expenses. The interest rate will be lower and you will only have to pay the interest on a monthly basis (no portion of the principle).

Otherwise, if you have an unsecured line of credit why on earth would the bank want to leave it outstanding permanently? There is nothing to secure the money, so of course it's realistic to expect they want a portion of it back every month to limit their liability.
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TrevorK wrote:
Dec 30th, 2013 2:41 pm
It sounds like you are having issues with the LOC having a mandatory minimum payment that may be above the interest owed for a given month?

You may want to look around at other lenders. At least with secured lines of credit you are able to make interest only payments, so you can always look into getting a secured line of credit for these sort of expenses. The interest rate will be lower and you will only have to pay the interest on a monthly basis (no portion of the principle).
TD lets me do this with a ULOC (but they may not for all customers and all types of LOCs). They used to require an additional amount, but as I was told by an insider, too many people were clogging up the ATM's by doing the withdrawal/deposit trick and depleting the cash for people who actually needed it to spend.

I believe there are some rules now for higher-ratio HELOCs that require amortization. Maybe laptop-tech can elaborate further since I see he's lurking.
Otherwise, if you have an unsecured line of credit why on earth would the bank want to leave it outstanding permanently?
For the interest stream perhaps? If they keep it open for 20 years and you're paying a significant spread, in such case, they've made their money back.
There is nothing to secure the money, so of course it's realistic to expect they want a portion of it back every month to limit their liability.
For some customers, in a credit contraction, yes, there's good reason for the banks to perhaps worry... Especially if there's a giant mortgage outstanding as well.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
[OP]
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TrevorK wrote:
Dec 30th, 2013 2:41 pm
It sounds like you are having issues with the LOC having a mandatory minimum payment that may be above the interest owed for a given month?
.
Yes this is my issue indeed, my entire interests for a YEAR on the $7,000 is $384 yet the bank wants a greater amount ($500) within 30 days?? Wtf, a loan-shark would have more mercy.

A LOC is not good for me if Im broke and need to borrow $10,000 for example but am unable to pay anything for at least 6 months.

Do you think 5.4% is a good rate? Whats yours?
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Gammatron wrote:
Dec 30th, 2013 2:59 pm
Yes this is my issue indeed, my entire interests for a YEAR on the $7,000 is $384 yet the bank wants a greater amount ($500) within 30 days?? Wtf, a loan-shark would have more mercy.

A LOC is not good for me if Im broke and need to borrow $10,000 for example but am unable to pay anything for at least 6 months.
Yes - an unsecured line of credit that has a minimum amount to be paid back every month may not be good for all situations. Losing your job is one of those, however let's look at both sides. Do you think the bank wants to loan you large sums of money when you have no realistic means to pay it back, and they have no asset to seize to get it back?
Do you think 5.4% is a good rate? Whats yours?
5.4% seems like an OK rate for an secured LOC (Prime + 2.4%). I know there was a time when people were getting rates of 7% (when prime was at this level and lower). I use a secured LOC, which is at prime (3%). I honestly do not know what my unsecured LOCs are at, I do not use them and only acquired them for free checks before I went with Select Service.

An unsecured LOC can also be beneficial for vehicle purchases because of insurance coverage, you are not required to maintain full coverage. Not that I think this is a good idea in every situation, but it is an advantage over financing through a dealer.
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Gammatron wrote:
Dec 30th, 2013 2:59 pm
Yes this is my issue indeed, my entire interests for a YEAR on the $7,000 is $384 yet the bank wants a greater amount ($500) within 30 days?? Wtf, a loan-shark would have more mercy.

A LOC is not good for me if Im broke and need to borrow $10,000 for example but am unable to pay anything for at least 6 months.

Do you think 5.4% is a good rate? Whats yours?
Shop around then - you don't have to accept payment terms on a LOC that you don't want. It sounds entirely rational that a bank would want to see some payment of the principle on top of the interest amount sooner rather than later on an unsecured LOC.

I would imagine that banks would be asking for payments in the manner described to prevent the situation of an unsecured line of credit being used to subsidise a lifestyle during an extended period of unemployment. I presume this entire payment issue would be cleared up if you offered an asset to secure the LOC.

Whilst a loan shark may have more mercy, they would likely be charging a higher interest rate than 5.4% (and may well increase the banks late penalty from $35 to forfeiture of your kneecaps).

Good luck solving the issue you're having - hopefully they can cut you a break if it is going to be a big issue cashflow wise for you.
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I open my unsecure LOC few months ago and I currently get a rate of 4.8%.

So the rate you are getting is not particularly good...
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Why don't you decline it and move on if you don't like the terms? Now if you had a house, banks would have given you HELOC at 3-3.5%.
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ksgill wrote:
Dec 30th, 2013 3:37 pm
Why don't you decline it and move on if you don't like the terms? Now if you had a house, banks would have given you HELOC at 3-3.5%.
Or stocks/bonds, there's lenders out there that will go as low as 2.5% for modest amounts, and even cheaper if the amounts are larger.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Besides if you only make interest only payments and there's repeat of interest only payments the bank just might close the account and require full repayment.
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TrevorK wrote:
Dec 30th, 2013 3:15 pm
An unsecured LOC can also be beneficial for vehicle purchases because of insurance coverage, you are not required to maintain full coverage.
Wait a minute, so your saying that a bank will not obligate me to get full cover insurance if I have a LOC and I finance the car from a dealership? But the bank has to be the same bank that gave me the LOC correct.

@ STARBOY

Is there compound interests in a LOC cash adavance if you default a monthly payment?
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starboy869 wrote:
Dec 30th, 2013 3:53 pm
Besides if you only make interest only payments and there's repeat of interest only payments the bank just might close the account and require full repayment.
I've never heard of this actually happening. Have you?
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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Gammatron wrote:
Dec 30th, 2013 3:59 pm
Wait a minute, so your saying that a bank will not obligate me to get full cover insurance if I have a LOC and I finance the car from a dealership? But the bank has to be the same bank that gave me the LOC correct.
An unsecured LOC is granted based on one's reputation and credibility, not as a charge or with recourse to any specific asset.

So any risk, including the risk of uninsured loss, would be your own.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
[OP]
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Okay can I do this? Lend $5,000 from a LOC to a friend and charge him 10% interest? What stops me from doing this and lending money to 4 people at once and make a profit without touching a penny of my own money.

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