I have explained early this year how to get an unsecured line of credit in Canada – since then, I got several people asking me on the difference between an unsecured line of credit and a home equity line of credit so I have decided to clarify the differences between the two in a post:

• An usecured line of credit has a higher interest rate than a home equity line of credit. The former’s interest is anywhere from 6% to 11%, the latter’s interest is usually about 2% to 4%. This is because the line of credit’s interest is usually Prime + 3% to 8%, while the home equity line of credit’s interest is usually prime ± 1%.

• A home equity line of credit is a type of mortgage. In fact, with a home equity line of credit, you are mortgaging the part of your house that you already own (e.g. your capital in the house). In an unsecured line of credit, you don’t mortgage anything.

• The credit limit on a home equity line of credit is usually much higher than that of an unsecured line of credit. The unsecured line of credit limit can be anything between $10k to $50k, while that of the home equity line of credit can be more than $100k. The credit limit on a home equity line of credit is tied to the current worth of your capital in your home. The credit limit on an unsecured line of credit is mainly tied to your income as seen by the bank.

• Both types are approved quite fast, but a home equity line of credit is usually approved faster.

• Approval criteria is different: for a home equity line of credit, the person approving your request only looks at the value of your current capital in the house. For an unsecured line of credit, the person approving your request checks your monthly income flow, your history with the bank, and your credit rating.

• Typically, your minimum payment for a home equity line of credit is the monthly interest, while the minimum payment for an unsecured line of credit is usually 3% of the whole loan amount or the interest rate, whichever is higher.

• Both the unsecured line of credit and the home equity line of credit are free from fees. There are some banks, however, that charge some fees on either one, or on both – but this is the exception and not the rule, and these fees can be certainly be negotiated.

• An unsecured line of credit has a more volatile interest rate than a home equity line of credit. The latter’s interest is more or less static and varies only if there is a substantial change in the interest rate set by the government.

I hope that I have clarified the differences between the two lines of credit. If you feel that I omitted something, then please, feel free to share in the comments section.

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