Are you struggling to find out which type of borrowing solution is right for you? Don’t worry, you’re not alone. With many different options, people are often unsure which will best suit them and their needs.
Both loans and lines of credit are a way for you to borrow funds to help pay off an unexpected expense or a large purchase that you need to make. Unlike a credit card, these payment options typically have a lower interest rate which makes paying off your debt more affordable as you can save on interest.
Let’s take a closer look at the differences between loans and lines of credit and find out which solution is right for you.
What is a loan?
A loan is a structured financial solution that allows customers to borrow money for a specific need such as making an everyday purchase they need to make or consolidating higher interest debts. Loans can be made available with fixed or variable interest rates and paid back in predictable fixed instalments.
Pros of a loan
If you struggle with controlling your spending, a loan may be the right choice for you. Fixed loans are designed to help pay off debt within a specific time frame. If you prefer the stability and structure of a fixed repayment plan, a Scotia Plan Personal Loan may be just what you’re looking for!
Cons of a loan
Loans are ideal for one-time expenses or purchases, like a home renovation or consolidating credit card debt, but keep in mind it is not a revolving credit. This means that the funds from the loan have been provided to you and you will no longer have access to additional funds as a future source of credit. If more funds are needed, you would have to reapply for another loan to receive more money. Also, the monthly payments will include a principal portion as well as the interest portion meaning, your monthly payments may be higher than on a line of credit where you could be approved to pay interest only as a monthly payment.
What is a line of credit?
A line of credit is a revolving borrowing solution that allows customers the flexibility and convenience of accessing funds to meet their diverse borrowing needs. The ScotiaLine® Personal Line of Credit may be an option for you that can be used (upon approval) for many types of unexpected expenses or everyday purchases, with the convenience of an access card.
Pros of a line of credit
Whether you’re renovating your home or consolidating debt, a line of credit gives you the flexibility and convenience of a revolving credit typically at a lower interest rate, which allows you to borrow money when needed. It allows you to withdraw funds up to the credit limit, and pay down at your convenience, provided monthly minimum payments are made. The convenience of only having to apply once ensures continuous availability of funds, which can be accessed through your Access Card, Online Banking, Mobile App, ABM and cheques.
Cons of a line of credit
Only having to pay the minimum monthly interest payments sounds good, right? Be careful, if saving money is not your strong suit, and you’re only paying the minimum monthly interest and none of the principal, you could end up paying more interest in the long run.
Should I get a loan or a line of credit?
Still wondering which is the best option for you? No problem. Here are some common uses for a loan and line of credit.
Common reasons to get a loan
- Debt consolidation to pay off higher interest debts and have the structure of a fixed payment plan - if you’re not disciplined this could help you stay on track and not overspend
- Large purchases or one-time expenses
Common reasons to get a line of credit
- Save money on interest by consolidating higher interest debts
- If you’re approved, a line of credit may offer more convenience and flexibility than a fixed term loan if you are disciplined in your payments
- Pay for education – check out our ScotiaLine® Personal Line of Credit for Students
- Home repairs and remodels
- Emergency expenses
- Life events i.e. getting married or having a baby
- Plan for retirement – check out our Scotia RSP Catch-Up® Line of Credit
How do I get approved?
Applying for a loan or line of credit is simple. Just like a credit card, you need to go through an application process to see if you are approved. This requires you to provide the following information:
- Full legal name
- Date of birth - must be at least 18 years of age
- Home address and phone number
- Employment and annual income
- Consent to a credit check
Make sure to have the following documents to go through an application:
- Valid identification
- Proof of income and employment:
o Recent paystubs (if regularly employed)
o Recent T-slips (for Overtime, Bonus or Other non-employment Income)
o Recent CRA My Account Assessment or Recent NOA and corresponding T1 General 4-page summary (For Self Employed, Commissioned Sales or Other non-employment income)
Make sure to check online on Communication Centre or Offers and Programs on our Mobile banking app or with your financial advisor today! Not a current Scotiabank customer? Visit one of our branches today to get started.