Personal Finance

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

  • Last Updated:
  • Jan 21st, 2014 12:08 pm
Deal Addict
May 2, 2007
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Mark77 wrote:
Dec 30th, 2013 3:59 pm
I've never heard of this actually happening. Have you?
Happened to a buddy of mine. However it went on for more than two years of just paying the 'interest' only. He was pissed since he had to start paying back the principle.

Some people...
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Feb 15, 2008
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Gammatron wrote:
Dec 30th, 2013 4:07 pm
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.
If your friends are willing to pay 10% interest, that means that they're such a poor credit risk that nobody else wanted to lend for any cheaper. Nothing stops you from doing this. However, if there are any losses, you have to make them up. As you remain legally obligated to pay back the LOC in full.
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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starboy869 wrote:
Dec 30th, 2013 4:08 pm
Happened to a buddy of mine. However it went on for more than two years of just paying the 'interest' only. He was pissed since he had to start paying back the principle.
The lender probably had good reason to believe that his overall credit metrics were deteriorating for factors other than the payment performance.

For instance, a bank that finances a business, may have good reason to pull back on lending to the employees of the business if it detects distress in the performance of the businesses' loans.
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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Nov 24, 2013
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I've had two different unsecured, personal lines of credit in my financial travels. One, with TD, was at 9% fixed, and didn't go down when Prime went down. It had a minimum monthly payment of 3% of the balance (though transferring money in between my chequing account and the line of credit was all that was really required). The second was an unsolicited offer from Scotia for Prime + 2.3%, with a minimum payment of $50 or Interest Only (whichever is higher, or balance in full if under $50). These are very different terms, both in interest and payment.

$7,000 balance under the TD scheme would be a $210 monthly payment. Under Scotia, it would be $50. All that truly matters is minimizing your interest expense over time (i.e., if you just pay the minimum on the Scotia one you'll take over a decade to pay it off, versus the TD scheme theoretically being paid off within 4 years if you don't borrow more), but if you're responsible in managing your debt yourself, the Scotia setup gives a lot more cash flow flexibility.
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Mark77 wrote:
Dec 30th, 2013 3:45 pm
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.
Can you take an advance against the stocks you own to buy a motorcycle at 2.5%? You can do whatever you want with the money you borrow through HELOC (3-3.5%). Big difference.
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ksgill wrote:
Dec 30th, 2013 5:35 pm
Can you take an advance against the stocks you own to buy a motorcycle at 2.5%?
Yes.
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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Mark77 wrote:
Dec 30th, 2013 5:37 pm
Yes.
Ah, something that I didn't know. How does one do that?
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ksgill wrote:
Dec 30th, 2013 5:54 pm
Ah, something that I didn't know. How does one do that?
Set up margin account. Deposit securities eligible for margin lending. Withdraw cash up until the Excess Funds limit, leaving a suitable equity buffer for the investments just in case they go down.
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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Mark77 wrote:
Dec 30th, 2013 5:57 pm
Set up margin account. Deposit securities eligible for margin lending. Withdraw cash up until the Excess Funds limit, leaving a suitable equity buffer for the investments just in case they go down.
I see, I thought you could only invest in products offered by the brokerage (stocks, bonds, ETFs etc.). Thanks.
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ksgill wrote:
Dec 30th, 2013 6:00 pm
I see, I thought you could only invest in products offered by the brokerage (stocks, bonds, ETFs etc.). Thanks.
No it works like a LOC, except that it is marked to market on a real-time basis, and any violation of the rules results in a margin call and liquidation.

Of course, to buy a motorcycle, probably the most tax efficient thing to do is to sell some of the stocks, buy the motor cycle, and then re-purchase the stocks on credit. Such that, the cost of the credit is tax deductible. For someone in the 30% tax bracket, that 2.5% interest (for instance) actually ends up costing them only (1-30%)*2.5% = 1.75%. Sure beats paying 6% at the dealer!!!!
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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Mark77 wrote:
Dec 30th, 2013 6:01 pm
No it works like a LOC, except that it is marked to market on a real-time basis, and any violation of the rules results in a margin call and liquidation.

Of course, to buy a motorcycle, probably the most tax efficient thing to do is to sell some of the stocks, buy the motor cycle, and then re-purchase the stocks on credit. Such that, the cost of the credit is tax deductible. For someone in the 30% tax bracket, that 2.5% interest (for instance) actually ends up costing them only (1-30%)*2.5% = 1.75%. Sure beats paying 6% at the dealer!!!!
Doesn't the money you borrow have to be "invested". How is buying a Motorcycle an investment?

On a different note, the probability of the bank calling HELOC back is very unlikely, so that would be the advantage of HELOC over margin against your investments?
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ksgill wrote:
Dec 30th, 2013 6:04 pm
Doesn't the money you borrow have to be "invested". How is buying a Motorcycle an investment?
Sure, and you are investing it. You sell $10k of stocks (assume the motorcycle costs $10k), buy the motorcycle with the stock proceeds. And then borrow $10k to repurchase the stocks. Voila, the money borrowed is invested in stocks, and thus, is eligible for tax deductibility of interest.

Smart people do this all the time, consume with cash, borrow to invest.
On a different note, the probability of the bank calling HELOC back is very unlikely, so that would be the advantage of HELOC over margin against your investments?
It happened in the US during their housing downturn. Also HELOC rates can go up, in response to decreased creditworthiness, either on an individual basis, or on a more macro/widespread basis.
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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Mark77 wrote:
Dec 30th, 2013 6:07 pm
Sure, and you are investing it. You sell $10k of stocks (assume the motorcycle costs $10k), buy the motorcycle with the stock proceeds. And then borrow $10k to repurchase the stocks. Voila, the money borrowed is invested in stocks, and thus, is eligible for tax deductibility of interest.

Smart people do this all the time, consume with cash, borrow to invest.
Nice strategy that makes sense.
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3.25% and 3.50%, respectively ... unsecured.

Oh wait, we aren't swinging LOC rates around? whoops
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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.
If you finance a vehicle from your LOC you can have whatever insurance coverage you want. As far as the dealer is concerned, this would be a cash purchase as the loan is between the bank and you (through your LOC), you're just bringing them a check (or paying with a CC, etc). I guess that brings up another point, you may receive a discounted price for your vehicle if you skip their low-rate financing.

If you finance a vehicle from the dealership, or another lender, where the vehicle is the asset the loan is secured to, then you are typically required to carry full coverage.

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