A personal line of credit and a personal loan both let you borrow in Canadian dollars, but one is revolving credit and the other is instalment credit. Which is cheaper depends far less on the product name than on how long you carry the balance and how quickly you repay it.
A personal line of credit and a personal loan can cover the same expense, but they are built differently. A personal line of credit is revolving credit: you are approved for a limit, you draw what you need, and you can repay and redraw. A personal loan is instalment credit: the lender advances a lump sum that you repay on a set schedule. Whether one is cheaper comes down to how long the balance exists, not the label on the paperwork.
| Feature | Personal line of credit | Personal loan |
|---|---|---|
| Structure | Revolving: a reusable limit | Instalment: a single advance |
| How funds arrive | Drawn as needed, up to the limit | Lump sum deposited at approval |
| Interest charged on | The outstanding balance, typically calculated daily | The principal, amortised over the term |
| Rate type | Often variable, priced off the lender's prime rate | Fixed or variable, set at approval |
| Payments | Minimum set by the lender; you can pay more | Fixed payment on a set schedule |
| Term | Open-ended, no fixed end date | Fixed term chosen at approval |
| Reusing the money | Yes, once repaid | No, unless you reapply |
| Main cost risk | Slow repayment and a rising variable rate | A long term and prepayment restrictions |
How a personal line of credit works
A line of credit behaves more like a flexible account than a loan. The lender sets a credit limit based on your income, credit history and existing debts. You draw any amount up to that limit, and interest is normally calculated on the balance you actually owe, usually daily, then charged monthly. Because the limit is reusable, repaying $2,000 frees up $2,000 you can borrow again without a new application.
Two features drive the cost. First, the rate is often variable and described as the lender's prime rate plus or minus a spread, so your borrowing cost moves when that prime rate moves. Second, the minimum payment is usually low relative to the balance. That keeps required payments manageable, but it also means a balance can sit for years if you only ever pay the minimum.
Secured and unsecured versions exist. An unsecured line is backed only by your promise to repay. A secured line is tied to an asset, commonly home equity, which usually means a lower rate because the lender's risk is lower — but the asset is exposed if you default.
How a personal loan works
A personal loan is a closed commitment. The lender approves an amount, advances it, and you repay principal plus interest over a set number of months. Because the schedule is fixed, your payment and the total interest are predictable from day one. The Financial Consumer Agency of Canada's overview of loans explains that lenders must disclose the cost of borrowing before you sign, including the annual percentage rate.
Loans may be fixed or variable rate, and open or closed. A closed loan locks the schedule and can carry a prepayment penalty or an interest differential if you pay it off early. An open loan lets you repay ahead of schedule, usually at a higher rate. Prepayment terms matter: a loan is only genuinely cheaper if you can carry it to the end of the term, or if you are allowed to pay it off early without giving back the savings.
When each one is cheaper
The rule of thumb: a line of credit tends to win when you repay quickly and irregularly; a fixed-rate loan tends to win when you need a predictable payment over a long, steady term.
Consider an illustrative example using rates that are not tied to any lender and that will vary by lender and province. You need $10,000.
- Line of credit repaid in about a year. At an illustrative 9%, paying roughly $875 a month clears $10,000 in 12 months and costs about $495 in interest.
- Three-year loan at a lower rate. At an illustrative 8% over 36 months, the payment is about $313 a month, but total interest is about $1,281 — roughly two and a half times as much.
The line of credit had the higher rate and still cost far less, because the balance existed for one-third as long. Interest is rent on money you have not repaid, and time is the biggest multiplier in the math.
Reverse the assumption and the answer flips. If you genuinely need three years to repay, the same illustrative 9% line of credit amortised over 36 months costs about $1,450 in interest, against roughly $1,281 for the fixed 8% loan. The loan is now cheaper, and it removes the risk of a variable rate rising mid-term.
A third factor is payment behaviour. A line of credit only delivers the cheaper result if you actually make large payments. The minimum on a $10,000 balance may be a small fraction of the principal, and a balance that drifts for five years can end up costing more than any fixed loan you could have signed.
Rate type, prime, and the risk you are carrying
A line of credit is usually priced as the lender's prime rate plus a spread, which means your cost can change without you doing anything. When the policy rate set by the Bank of Canada moves, lenders' prime rates typically follow, and a variable-rate line reprices with them. The Bank of Canada's published interest rate data shows that movement over time.
A fixed-rate personal loan does the opposite: it locks the cost, so a rate increase mid-term does not change your payment. That certainty is a real feature, but it comes with a trade-off — if rates fall, you keep paying the higher fixed rate unless the agreement lets you refinance cheaply.
One practical gap to watch: a line of credit does not automatically come with a repayment plan. The discipline has to come from you, in the form of a self-imposed schedule. A loan builds the schedule into the contract.
Co-signers, joint borrowers, and approval
A line of credit is generally harder to qualify for than an instalment loan. The lender is extending an open-ended, reusable limit, so it takes on more uncertainty and looks closely at income stability, debt-to-income ratios and credit history. A loan has a defined end date, which makes it easier to underwrite.
If you cannot qualify alone, a co-signer can help with either product, but the risk profile differs. On a loan, the maximum exposure is the approved amount plus interest. On a line of credit, the balance can grow up to the limit, so a co-signer's potential exposure is less predictable — and a limit can be increased later. Our guide to what a co-signer is explains how co-signing works, and the New Brunswick Financial and Consumer Services Commission outlines the obligations you take on before co-signing a loan.
Both products appear on your credit report, and payment history on either affects your score. The FCAC's material on credit reports and credit scores explains how lenders read that history. A maxed-out revolving line can weigh on your credit utilisation, while an instalment loan can diversify the mix of credit you hold.
Common mistakes
- Treating an approved credit limit as spending money rather than a maximum.
- Assuming the lowest advertised rate is the rate you will be offered; personal rates vary by lender, province and credit profile.
- Paying only the minimum on a line of credit and never clearing the balance.
- Signing a closed loan without checking prepayment terms, then finding that early repayment does not reduce the interest.
- Co-signing a line of credit without considering that the balance can climb to the full limit.
- Borrowing more than needed because a lump sum is available, then paying interest on money sitting idle.
- Comparing only the monthly payment instead of the total cost of borrowing.
If you are weighing the two, run both scenarios through a loan payment calculator using the actual rates you are quoted, not the illustrative ones above. If your credit history makes approval unlikely, bad credit loans in Canada outlines what lenders look at and what alternatives exist.