Personal loan vs line of credit is a common question for Canadians deciding how to borrow. Understanding the practical differences — interest, repayment, flexibility and cost — helps you pick the right borrowing option for needs like debt consolidation, a renovation or an emergency fund.
What each product is
Personal loan — fixed-dollar loan with scheduled payments. You borrow a set amount, get it in a lump sum and repay principal plus interest over a fixed term (e.g., 2–7 years). Monthly payments are usually predictable.
Line of credit (LOC) — revolving borrowing with flexible access. Lenders approve a maximum limit; you borrow, repay and re-borrow up to that limit. Interest is charged only on the outstanding balance.
Key differences at a glance
Repayment structure
Personal loan: fixed amortization and regular payments.
LOC: minimum payments (often interest-only) and flexible principal repayments.
Interest rate
Personal loan: often fixed or variable; fixed rates are common for predictability.
LOC: typically variable and linked to prime rate; rates can be lower than unsecured personal loans but can fluctuate.
Access to funds
Personal loan: one-time lump sum.
LOC: ongoing access; withdraw as needed.
Cost predictability
Personal loan: high predictability.
LOC: lower predictability due to variable rate and flexible payments.
Use cases
Personal loan: fixed-cost projects (debt consolidation, auto purchase, home improvements).
LOC: ongoing or unpredictable expenses (cash flow gaps, emergency buffer, repeating projects).
Pros and cons (checklist)
Personal loan:
Pros: predictable payments; easier budgeting; sometimes lower total interest if rate fixed.
Cons: no future access to funds without reapplying; possible early repayment penalties.
Line of credit:
Pros: flexible; interest only on what you use; good for intermittent needs.
Cons: variable interest risk; temptation to carry debt; potentially higher long-term cost if only making interest payments.
Secured vs unsecured and HELOC
Unsecured LOCs and personal loans rely on creditworthiness; rates tend to be higher.
Secured versions use collateral (e.g., a car or savings) and offer lower rates.
Home equity line of credit (HELOC) is a secured LOC using your home equity and usually offers the lowest rate among consumer credit products. For details on HELOCs and mortgages, see the Government of Canada's housing pages at the Canada Mortgage and Housing Corporation (CMHC).
How interest and payments work
Check rate type — fixed vs variable for loans; variable for most LOCs.
Understand amortization — loans have set amortization; LOCs don't unless structured with a repayment plan.
Calculate total cost — estimate interest over the expected holding period. Changing payments and balances affect LOC cost.
For explanation of credit product basics, see the Financial Consumer Agency of Canada (FCAC).
How to choose: step-by-step
Define the purpose — fixed one-time cost vs ongoing/uncertain cash needs.
Estimate how long you'll carry the debt — short term vs long term affects cost.
Compare rates and fees — get quotes for fixed-rate personal loans, variable and secured LOCs.
Check repayment discipline — if you'll pay principal consistently, a loan may be best; if you need flexibility, an LOC may suit.
Consider collateral willingness — if you can use home equity and need low rate, a HELOC might be optimal.
Read terms — look for prepayment penalties, renewal rules and minimum payment formulas.
Apply with documents — proof of income, ID, chequing account details and credit history.
Applying: a typical process (numbered)
Gather documents — recent pay stubs, notice of assessment from CRA (available via CRA My Account), ID, and bank statements.
Get pre-approval or rate quotes — compare banks, credit unions and online lenders.
Review the offer — focus on interest rate type, fees, repayment schedule and collateral requirements.
Accept and sign — funds for a personal loan arrive as a lump sum; an LOC is set up for withdrawals.
Set up automatic payments — helps avoid missed payments and protects your credit score.
Important considerations for Canadian borrowers
Credit score: Affects rate and approval; check with TransUnion or Equifax.
Prime and policy rates: LOC rates are often tied to prime; monitor the Bank of Canada rate decisions via the Bank of Canada to understand potential changes.
Tax treatment: Interest on personal consumer borrowings is generally not tax-deductible. If borrowing to invest, consult CRA guidance or an accountant.
Government protections: Read consumer protection and disclosure rules at the FCAC consumer information pages.
Quick decision checklist
Need predictable monthly payments and one-time funds? Choose a personal loan.
Need flexible access over time and will manage variable rates? Choose a line of credit (or a HELOC if you want lower secured rates).
Unsure? Get quotes for both and run a scenario of expected payments and total interest before deciding.