This is another one of those common sense stories. Jennifer is an
administrator in a small high tech company. She has worked at the same
job since 1980. Her Union tells her that they may go out on strike
to support another Union's demands.
Like many Canadians, Jennifer lives pay cheque to pay cheque.
She saved for a whole lot of years to put aside enough money to put as
a down payment on a home three years ago. Although difficult, she
has found a way of balancing budgets to make do. Imagine a strike.
No salary. No savings. Is she going to lose her house?
How long will the mortgage company wait before they react?
She calls me in a panic, needing answers to all these questions.
The first thing is to is to relax. A mortgage lender will not act
on its right to accelerate your mortgage (demand their money back) until
you are at least 2 months in arrears. I advise her to go to her credit
union, ask for "overdraft protection" or an "unsecured" line of credit
(LOC)
Overdraft protection is a privilege granted to a good client that will
allow one's chequing account to honour cheques even though there is no
money in the account. Usually, the lender will accommodate this though
a glorified cash advance against one's credit card. Of course, you
must pay back the credit card with interest at rate of 15% to 22%.
In the short haul though, this will indeed alleviate her potential pressing
problem.
The unsecured line of credit (LOC) is a much better deal. The
lender will qualify you today as a good risk, and will give you cheques
that you can write in the event you are short of cash. The interest
rate on these lines of credit is usually based at the Lender's Prime rate
plus 2% (9% at time of publishing).
Jennifer was worried about having to repay the overdraft or line of
credit. Most times, the overdraft or LOC will charge you interest
only on the amount you borrow, when you borrow. In other words, if
Jennifer's mortgage payment is $1000, she uses the line of credit to pay
the payment, then the line of credit will send her a bill in 30 days.
The interest portion will be about $10. She can afford that out of
her strike pay. When she does go back to work, she can set aside
money on each pay cheque to pay down the line of credit. So with
renewed confidence, Jennifer applies for the line of credit at her credit
union. Even though she had good residential stability, great job
stability, excellent credit, and workable salary, she was denied credit.
I could not believe my ears. I called her credit union to find out
why. It seems that when she applied, she mentioned to her loans officer
that the imminent strike prompted her to seek this LOC and if it is a long
strike, she very well may have to go bankrupt. It's no wonder she
was turned down.
When you apply for your line of credit, it should be noted that the
reason you are applying is one of potential need, not one of desperation.
We proceeded to apply to another lending institution who ran her numbers
(debt to income ratios) and everything fit. She was granted an $8,000
line of credit. She can now afford to go out on strike, if that's
what she feels she has to do.
It is not a good idea to borrow if you don't have to but in certain
circumstances beyond your control, having a line of credit or overdraft
privilege to fall back on can save the day.