What Benefits For Me In a "Line of Credit"?

[Kommander_KornFlakes]

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I'm a complete noob and new to financial mambo-jumbo, just last week I heard about personal lines of credit from a co-worker, now I'm interested in getting one to finance a new motorcycle.

Anyways, it's my understanding that a line of credit is basically an artificial savings account, right? Let's say I get a $15,000 line of credit, this means I can get cash advances and buy a new motorcycle with this money, at very low interest rates, right?

Anyways, I'm going to go to Bank of Montreal to apply for one, I know that BMO is the cheapest most ungrateful bastards of all banks but it has been my bank for almost 18 years.

I'm in my 30's and make $900 a week net (after taxes), have no debts and have never been in bankruptcy. What limit $$$ do you guys think I will get from the Bank of Montreal?

[sunnybono]

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I'm a complete noob and new to financial mambo-jumbo, just last week I heard about personal lines of credit from a co-worker, now I'm interested in getting one to finance a new motorcycle.

Anyways, it's my understanding that a line of credit is basically an artificial savings account, right? Let's say I get a $15,000 line of credit, this means I can get cash advances and buy a new motorcycle with this money, at very low interest rates, right?

Anyways, I'm going to go to Bank of Montreal to apply for one, I know that BMO is the cheapest most ungrateful bastards of all banks but it has been my bank for almost 18 years.

I'm in my 30's and make $900 a week net (after taxes), have no debts and have never been in bankruptcy. What limit $$$ do you guys think I will get from the Bank of Montreal?

to qualify for an unsecurred LOC, first and foremost you must be gainfully employed as the bank will look at your gross yearly income (not your net) to see if you can afford one. Secondly, they sometimes look at your net worth, assets minus liabilities and thirdly which I beleive is the most important is your credit worthiness. Credit worthiness just doesn't mean if you are late with payments, but they take other things into consideration as to how much debt you have already outstanding and how much debt you have available to use (even if you haven't used them). They will also look to see how fresh your credit history is, that is how long have you established yourself.

With respect to rates, you can pretty much guarantee prime + 1% or 2%. Monthly payments are based on the monthly outstanding balance over a 3 year amortization. So if you borrow just the one time, and you make your monthly payments as determined by your bank, you should pay it off fully by 3 years.

Yes a line of credit is revolving which means that you can borrow today, pay it off tomarrow and then borrow again the following day. you can do as you please with the line, cash advances, purchase assets (like your bike) or invest. Choice is yours and the bank doesn't really care as long as you make your monthly payments!!!

Hope this helps!!!

sk

[Kommander_KornFlakes]

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Thanks man, it helped a lot, I wonder why people make outrageous car payments when they can buy the bloody thing in one shot with a line of credit and pay off the bank directly which will be cheaper.

[schnitzer]

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Thanks man, it helped a lot, I wonder why people make outrageous car payments when they can buy the bloody thing in one shot with a line of credit and pay off the bank directly which will be cheaper.

because some people have no self control and they would pay off the interest only. and car loans are a lot easier to get because the car is used as security. in case you ever unable to make payments, the bank has the right to repossess your car, sell your car and use the proceeds to pay off your bank loan.

[notanexpert]

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Thanks man, it helped a lot, I wonder why people make outrageous car payments when they can buy the bloody thing in one shot with a line of credit and pay off the bank directly which will be cheaper.

The other reason why a lot of people get car loans is sub-vented rates. Lots of "captive"( i.e. car manufacturer owned) fianance companies offer interest rates that are below market, like 2.9% or even 0%. This often makes people think they're getting a better deal than fianancing through a line of credit. Of course, the real full cost of the financing is built into the profit margin on the car sale.
However, depending on how the deal is structured, it is not always possible to negotiate a better deal overall by paying using your line of credit, so that's how even the most financially savvy sometimes end up with sub-vented car loans.

[gman]

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Thanks man, it helped a lot, I wonder why people make outrageous car payments when they can buy the bloody thing in one shot with a line of credit and pay off the bank directly which will be cheaper.

Because the dealer's car loan usually is a better deal than LOC which usually at best is the prime rate. That can't beat 0%, 1%, 1.9%, ... car loan offered by the manufacturer.

[Jucius Maximus]

However, depending on how the deal is structured, it is not always possible to negotiate a better deal overall by paying using your line of credit, so that's how even the most financially savvy sometimes end up with sub-vented car loans.

Could you please explain what you mean by this in more details?

What is "sub-vented" ?

[notanexpert]

Could you please explain what you mean by this in more details?

What is "sub-vented" ?

Sub-vented generally means that the company is loaning you money below their cost of capital. Say this is GMAC and you're financing a GM car. Suppose GMAC can borrow money at 5% by floating bonds and then gives you a car loan for 0.9%. That is a sub-vented loan, because they're loosing money on it (4.1% plus administrative costs). GMAC gets paid by GM (who also owns a big chunk of them) to do this so that GM can sell more cars and hopefully make up for those losses on the financing. This is the theory of it anyway.

(In reality, GM can't make any money on cars anyway, no matter how many they sell since they loose money on each one. So GMAC has been the cash cow for them since they loaned out abunch of that money for mortgages, and that's how they made up for the losses at GM, but that's totally outside this topic.)

Your cost of capital (or cost to borrow from you line of credit) may be 6%, so in this case, no matter how good of a deal-maker you are, after all is carefully calculated and analyzed, it may be a better deal to pay a premium for the car and get a loan at 0.9% form GMAC, versus paying a discounted price on the car and financing from your line of credit at 6%.

[jeeva86]

What does the Unsecured part of the LOC mean? I have a 10K TD LOC right now but the interest rate is 10%. I was pre-approved so I decided to sign up for it. How can I get a lower rate since I'm working FT now, vs. student status before?

[gman]

What does the Unsecured part of the LOC mean? I have a 10K TD LOC right now but the interest rate is 10%. I was pre-approved so I decided to sign up for it. How can I get a lower rate since I'm working FT now, vs. student status before?

Your LOC is unsecured LOC. That means it is not back by a property, usually, a house.

[jeeva86]

However a finance on a car is secured?

[gman]

However a finance on a car is secured?

Not really. There is not much equity once the new car is sold.

[notanexpert]

However a finance on a car is secured?

Officially, yes, car financing is secured, although the asset providing the security is not as high-quality as real estate, therefore the rates on car loans from banks are higher than mortgage rates. There is a lien registered against your car when you finance it using a car loan. With a lien against your car, you'd for example be prevented form exporting the car from Canada, because it is being used a s security against your loan. You're also required to have collision insurance, again for the same reason.

[eelfliw]

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Thanks man, it helped a lot, I wonder why people make outrageous car payments when they can buy the bloody thing in one shot with a line of credit and pay off the bank directly which will be cheaper.

Given today's interest rates, it only makes sense when you forgo the optional insurance such as collision & comprehensive. But the rates differ widely depending on your location, type of car storage and the type of car. So calculate carefully.

[Kommander_KornFlakes]

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Okay, so I went to the Bank of Montreal today to apply for a LOC and the bastards only offered me a pathetic $5,000. They refused to even let me apply for a $10,000 LOC because they said I did not have any assets, just my used vehicle.

The lady offered to uppen the limit on my Mosaik MC but I told her that was usless to me because I wanted the LOC for spontaneous purchases, like when I see a motorcycle I want to buy and don't have the cash readily available, with a MC how the hell am I supposed to buy a motorcycle cash?

BMO is full of sh*t, I should has switched over to CIBC or Royal a long time ago.