What you should know about financing a vehicle with a Line of Credit
1 ❖ SECURITY
If utilizing a Home Equity Line of Credit (H.E.L.O.C.) or a Farm Equity Line of Credit (F.E.L.O.C.) a lien is registered against the home or farm and is held as security (collateral) for the line of credit. In the event you were unable to repay the line of credit for unforeseen circumstances, the bank could repossess your home or farm in order to satisfy repayment. A Dealer Plan loan does not hold your home or farm as collateral for the loan.
2 ❖ FLUCTUATING INTEREST RATES
The interest on a line of credit is a variable (floating) rate. This means that when the prime rate changes, so does the interest charged on your line of credit. You have no protection from increasing interest rates. The advantage of financing with a fixed interest rate from the dealership’s Dealer Plan is that the interest rate is locked in, protecting you from climbing interest rates. You always know exactly
what your payment is and when it will be paid off. Dealer Plan loans also offer variable interest rates, so that if you wish to stay with a variable interest rate, you can keep your line of credit in tact and available for other purchases or investment opportunities.
SPECIAL NOTE: Many people are attracted to lines of credit because of their low interest rates. Rates on an unsecured (no collateral) line of credit can be as low as one or two points over the prime rate. However, line of credit interest rates can be substantially increased by the branch. If, for example, you were slow repaying your monthly obligation for 2 or 3 months (because of some unforeseen difficult circumstances), your line of credit interest rate could be more than DOUBLED! Line of credit rates can increase even if the prime rate doesn’t!
FUTHERMORE: In many cases, Dealer Plan fixed interest rates will be the same or less than 2 percentage points higher than lines of credit. With the fixed rate you always know what your interest rate will be, how much your payment will be, and exactly when it will be paid off!
3 ❖ 3% PAYMENTS
If you have an outstanding balance of $30,000 on your line of credit because you have used it to pay for your vehicle, this means that your monthly payment would be 3% of $30,000, which equals $900 a month! This is much more than what a monthly payment would be over a normal 60 month term on a Dealer Plan loan (approximately $600 month or less). You may also be given the option of making interest-only payments. In this case, you are only paying the interest charge for a single month and not paying down the principal amount of the outstanding balance. Although this may seem convenient and affordable, for many people this becomes a TRAP where they become comfortable paying the lower amount each month, yet never pay down the balance.
4 ❖ POSSIBLE USAGE CHARGES
Many line of credit have fees such as a $20 - $25 per month USAGE FEE and a charge to certify cheques (even secured lines of credit). Even if you are able to obtain a very low variable interest rate with your line of credit, these extra charges may end up costing you more per month than a higher fixed interest rate through the dealership’s Dealer Plan.
5 ❖ POOR DISABILITY CREDIT PROTECTION COVERAGE
Disability insurance on a line of credit does not cover the entire payment; rather it covers the payment on the average balance over the previous twelve month period. You may be in a situation where you are unable to cover the minimum required payment on your current balance even if you have the disability coverage.
Unlike Dealer Plan disability insurance, line of credit coverage often requires the completion of a medical questionnaire at time of application to qualify for the coverage. You can even be denied coverage based on your answers to the questionnaire. Further, disability coverage on line of credit are referred to as “elimination” policies. This means that there is normally a wait period; a period of time where no benefits are paid; ninety day wait periods are common. Line of credit coverage may have other restrictions before benefits are paid.
Disability insurance on a Dealer Plan loan makes your loan or lease payments in the event that you are ill or injured and cannot work at your job and chosen profession. There are no medical questionnaires, blood or urine tests or physical examinations required for acceptance into the program and all customers are accepted into the program regardless of occupation and current health. All customers in the insurable age group (e.g. ages 18 - 65) also pay the same premiums. There are no limits to the number of claims during the life of the loan or lease agreement, confinement to the home or hospital is not required for payment of benefits, the coverage pays in addition to any other insurance benefits or salary continuations being received and there is no income tax payable on the benefits. You can even
choose various “retroactive” plans that pay benefits from the first day of recorded illness or injury.
6 ❖ REVOLVING CREDIT
A line of credit is like a credit card in that it can be utilized on an on-going basis. This is referred to as revolving credit. The “trap” that many line of credit customers fall into is that they never pay off their vehicle or they pay it off very slowly over a long period time. Many also pay off some of the balance and then run it up again with other purchases. The interest charges become extremely expensive when they are tacked onto large dollar balances over long periods of time.
Dealer Plan loans are referred to as “installment credit”. You make equal monthly payments based on the initial amount financed over a chosen fixed term (e.g. 60, 72 or 84 months).
7 ❖ ANNUAL REVIEWS
There is no guaranteed repayment term attached to a line of credit (e.g.: like a 60, 72 or 84 month term on a conventional loan). Since the term is not guaranteed by the financial institution, this means that the line can be “called” at any time. If the financial institution has concerns about your ability to repay the balance owing on your line (because of an economic recession, a downturn in your career field, job loss, etc.) they can demand FULL repayment of the balance owing on thirty days notice.
The financial institution may also become nervous about your ability to repay when your line of credit is constantly at its maximum and you are making interest-only payments. In some cases the financial institution may force you to close your line of credit and re-finance the balance on a high interest consolidation loan. In this situation, not only do suffer the high interest rate, but your credit rating may be damaged also. The line of credit is reviewed each year by the financial institution to decide whether or not to allow it to continue.
8 ❖ POOR UTILIZATION OF CREDIT
Lines of credit are offered to people like you that have established an excellent credit rating, a good relationship with your bank, career stability, residence stability and success. Lines of credit are a privilege; the unmonitored use of the bank’s money for your own purposes. Personal lines of credit were designed for things such as:
Home additions, improvements or remodeling
Home landscaping or a pool
A child’s university tuition
A child’s wedding
Cash for an investment opportunity
Why waste the “privilege” of your line of credit on a vehicle, when low, fixed rate interest financing is easily available through your dealership. And, if the allure of a low interest rate is just too attractive, Dealer Plans now also offer variable interest rates.
However, with a Dealer Plan variable interest rate, your payment will never go up - you can choose an option whereby your payments remain fixed even if the interest rates go up. Additional interest is simply added to the end of the loan. Have your new vehicle financed by a Dealer Plan loan and still have your credit line untouched and completely available for whatever you want!