Quote:
Originally Posted by dn53
Someone educate me, what is the difference between secured and unsecured?
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if you have equity in a property you can use that as collateral, i.e. if you default on your LOC, the bank can claim against your property - because of this the bank's risk is much lower thus you will get a lower rate. Almost anyone with a pulse and equity in a property can get a LOC at prime + 0.5% up to about 80% LTV (means you must have >20% equity always - this may be out dated LTV information)
unsecured LOC aren't great as the bank has little recourse if you don't pay back (as in, they can't encumber an asset, of course they will actually have legal recourse) - they are loaning to you based on your income to pay back the LOC = higher risk = higher rate, as we're seeing in this thread.
A couple of reasons why secured LOC's are great:
- Cheap immediate money
- No need to actually hold a 6 month emergency fund if you're an investor (you can invest almost all your excess cash), as any short term emergencies can be covered by a cheap LOC
- You can use funds to invest and deduct the interest against the investment income (there's a thing called a smith maneuver which is basically paying off your mortgage then immediately taking out money on your LOC (as your mortgage gets paid down, the amount of available LOC increases) to invest in, say, equities... for some reason people think this is a god send... it's not, it's a nice tax tool, it's not the secret fountain of financial freedom - hard work, saving/investing your money every month and living within your means is the real secret... and very few actually know about this one)
ok, i've digressed.