Unsecured Line of Credit

[testinz]

We just bought a new house (with a huge mortgage) and the bank offered us an unsecured line of credit for $20,000 @ 8%.

Is it a good idea to have a line of credit with such a big amount? If we decided to buy a new car in 1 or 2-year time, does this LOC affect the new car loan?

Thanks!

[gman]

We just bought a new house (with a huge mortgage) and the bank offered us an unsecured line of credit for $20,000 @ 8%.

Is it a good idea to have a line of credit with such a big amount? If we decided to buy a new car in 1 or 2-year time, does this LOC affect the new car loan?

Thanks!

It is always good to have a LOC. However, the rate is bad. A loc can't be a fixed 8% (I think). So, I assume it is prime + 2%. If you can, you should get a secure LOC. Yes, there is a fee but bank usually has promotion once a while to waive the fee. Ask your banker to inform you when that happens. Will that affect your car loan? It depends on many other factors.

[testinz]

Sorry for not mentioning it. It is prime + 2%.

I cannot get a secured LOC yet because the mortgage is new. Didn't pay off anything on the mortgage yet.

I got 2 offers for prime + 2% (lowest offer I can find so far), one is for 20,000$, the other is for 11,000$.

I heard that the higher the LOC amount, the lower the rate, is it true?

[gedwards]

I heard that the higher the LOC amount, the lower the rate, is it true?

It is not the amount of the LOC that drives the rate. The most significant factors that drive the rate of a LOC include: is the LOC secured, how much total debt do you have (ie do you have to much), what is your income ( ability to repay) and of course your credit score. That said without knowing all of your details...given the fact that you have a new house with large mortgage and the line of credit is unsecured I don't think prime + 2% is really that bad. LOC rates can be negotiated with the bank so it is worth trying. You might not get anywhere doing this but it is free to ask.

I would definitely get the LOC. If you have just bought a house and it has a high mortgage a LOC can be very helpful in case an emergency repair comes up and you need the funds. There are also many many startup costs you tend to have when you buy a new house. Of course all of this is based on assuming you are disiplined and won't run up the $20,000 LOC on things that are not really needed. A LOC costs you nothing unless you use it. So get it an keep it for emergencies only.

I wouldn't worry about the LOC impacting the car loan at this point. A car loan would be secured against the car so they are not that difficult to get. The LOC will only be an issue if they feel you have to much debt outstanding and your income can't bare that much debt. But deal with that when you get the car. Worse case if you are told you have to much debt you can then either cancel the LOC or cut it back to a smaller amount to satisfy their lending requirements.