Consolidating Debt Through a Line of Credit or Overdraft


Are you looking for debt consolidation options in order to reduce the interest rate or enjoy the convenience of making a single monthly payment? When you approach a credit counselor, one of the options he/she may walk you through is consolidation through an overdraft or line of credit.

How it works

When you qualify for a line of credit or overdraft, you will receive a credit card which allows you to access different loan options or pay bills and credit card balances. You may also combine all these into one payment. There are two main types of lines of credit or overdrafts: secured and unsecured.

How much do you qualify for?

The amount of money you qualify for as an overdraft or line of credit will depend on several factors:

  • Your credit score
  • Your net worth (how much do you owe compared to your assets)
  • Your lender’s policy (e.g. the max they can give as an overdraft, this can change from time to time)

Unlike a home equity loan where you’ll be given a lump sum, when you qualify for an overdraft, the bank allows you to withdraw beyond what you have in your debit account. On the other hand, if you get a line of credit, you get a separate credit account that you can access funds when you are in need.

Advantages of overdrafts and lines of credit

  • In many cases, overdrafts and lines of credit have very low-interest rates.
  • Since you will get to pay off your debt before time, you save on interest and have minimal monthly repayments that you can easily manage.
  • You have an opportunity to keep the line of credit open for the times when you need the cash even after consolidating your loans. So long as you maintain a good relationship with the lender, the money will remain accessible to you.
  • In the event that you lack the money, you can make minimum payments that cover the interest.
  • Lines of credit provide lenders money on a needs basis. Instead of having to apply for a one-time personal loan especially unsecured financing, you get a line of credit that you can repay within a short time and then sort out your financial issues.
  • It’s easier to negotiate for a line of credit or overdraft than a loan especially if you’re looking for debt consolidation Toronto.
  • Unlike credit cards where the interest begins to accrue when you get the card, with a line of credit or overdraft, you will only pay interest if and when you access the money.

Disadvantages of lines of credit or overdrafts

  • This type of credit requires great financial discipline. If you are not well disciplined, you may remain in debt for a long time since the minimum payment needs to only cover the interest.
  • Interest rates are variable and can increase someday
  • If you combine the monthly fee plus the interest rate of the overdraft, it can burdensome and in some cases, higher than credit card interest rates.
  • You are unlikely to qualify for a line of credit if you have a very low credit rating.
  • The interest on lines of credit isn’t tax deductible and this increases the cost further.
  • Some lenders even charge maintenance fees with a line of credit, another additional cost that you have to deal with.