Line of credit or personal loan? Both let you borrow money and both come from banks and alternative lenders across Canada — but they work quite differently, and picking the wrong one can cost you more than you expect. This guide breaks down exactly how each works, when each makes sense, and how to decide.
What is a personal loan?
A personal loan gives you a fixed lump sum upfront, which you repay in equal instalments over a set term — typically 6 months to 7 years. The interest rate is usually fixed, so your payment stays the same every month, making it easy to budget. Once you’ve borrowed the money, that’s it — you can’t draw more without applying for a new loan.
What is a line of credit?
A line of credit (LOC) is a revolving credit facility: the lender approves you for a maximum limit, and you can draw, repay, and redraw funds as needed, similar to a credit card but usually at a much lower rate. Interest is charged only on the amount you’ve actually drawn, not your full limit, and rates are typically variable, tied to the lender’s prime rate.
Key differences at a glance
- Structure: Personal loan = one-time lump sum. Line of credit = ongoing, reusable access to funds.
- Interest rate: Personal loans are usually fixed. Lines of credit are usually variable and move with the prime rate.
- Repayment: Personal loans have fixed instalments over a set term. Lines of credit typically require only a minimum interest payment each month, though you can pay down principal any time.
- Best for: Personal loans suit a single, known expense. Lines of credit suit ongoing or unpredictable expenses.
- Discipline required: A personal loan forces a payoff schedule. A line of credit’s flexibility can mean it lingers longer than intended if you only make minimum payments.
When a personal loan makes more sense
If you know exactly how much you need and want the certainty of a fixed payment and a fixed end date, a personal loan is usually the better fit. Common examples: consolidating multiple debts into one predictable payment, funding a specific home renovation, covering a large one-off expense like a wedding or medical procedure. The fixed structure also makes it easier to see, from day one, exactly what the loan will cost you in total interest.
When a line of credit makes more sense
A line of credit fits better when your borrowing need is ongoing or uncertain in size — for example, covering irregular income gaps if you’re self-employed, having a safety net for unpredictable expenses, or funding a project in stages (like a renovation with several payment milestones) rather than all at once. You only pay interest on what you draw, so it can be cheaper than a loan if you don’t end up needing the full amount.
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Cost comparison: fixed vs. variable rates
Because personal loan rates are usually fixed, your total interest cost is knowable in advance — helpful for budgeting and for comparing offers side by side. Lines of credit carry variable rates, so your payment and total cost can rise if the prime rate increases during your repayment period. That variability is the trade-off for the flexibility of only paying interest on what you draw. If rates are rising or expected to rise, a fixed-rate personal loan can offer more predictability; if you value flexibility over certainty, a line of credit’s pay-as-you-draw structure may cost less overall, provided you don’t let a balance linger.
Which should you choose?
As a general rule: choose a personal loan for a single, defined expense where you want a guaranteed payoff date and a fixed payment. Choose a line of credit for ongoing, variable, or uncertain borrowing needs where flexibility matters more than payment certainty. If you’re consolidating debt specifically, a personal loan’s fixed schedule usually helps more people actually pay it off — see our guide to debt consolidation in Canada for more detail.
Frequently asked questions
Is a line of credit cheaper than a personal loan?
It depends on how you use it. You only pay interest on what you draw, which can make it cheaper if you don’t need the full amount — but variable rates and the temptation to carry a revolving balance can make it more expensive over time if not managed carefully.
Can I have both a personal loan and a line of credit?
Yes, many Canadians hold both for different purposes — a personal loan for a specific past expense, and a line of credit as an ongoing safety net. Lenders will factor both into your debt-to-income assessment for future borrowing.
Which is better for debt consolidation?
A personal loan is usually better for consolidation, since the fixed term and fixed payment create a guaranteed payoff date — a line of credit’s flexibility can make it easier to keep carrying a balance indefinitely.
Does applying for either affect my credit score?
Both typically involve a hard credit check when you formally apply, which can cause a small, temporary dip. Many lenders offer a soft-check pre-qualification for either product so you can compare offers first.
Ready to decide? Estimate your repayments, explore our loan products, or speak to a consultant today.
This article is for general guidance only and does not constitute financial advice or an offer of credit. Loans are subject to eligibility, affordability assessment and verification. Loan Assure is committed to responsible lending.