When you need to borrow money, two of the most common options at Canadian banks and credit unions are a personal line of credit and a personal loan. Both can be useful, but they are built for different situations. Choosing the wrong one can cost you more in interest or make it harder to stay on track.
How a Personal Loan Works
A personal loan gives you a fixed amount of money upfront. You repay it in equal instalments over a set term, often one to five years. The interest rate is usually fixed, so your payment stays the same until the loan is paid off.
Best for: one-time expenses with a known cost, such as a car repair, a home project with a fixed quote, or consolidating several debts into one payment.
How a Line of Credit Works
A line of credit gives you access to money up to a set limit. You borrow only what you need, when you need it, and pay interest only on the amount you use. As you repay, the available credit becomes available again — similar to a credit card, but usually at a lower interest rate.
Most lines of credit have a variable interest rate tied to the lender’s prime rate, so your interest cost can rise or fall over time. Minimum payments are often low, sometimes interest-only.
Best for: ongoing or unpredictable expenses, such as a renovation paid in stages, irregular income, or a backup source of emergency funds.
Side-by-Side Comparison
| Feature | Personal Loan | Line of Credit |
|---|---|---|
| How you receive money | Lump sum upfront | Borrow as needed up to a limit |
| Interest rate | Usually fixed | Usually variable |
| Payments | Fixed instalments | Flexible; minimum may be interest only |
| End date | Yes — paid off by end of term | Often open-ended |
| Re-borrowing | No — need a new loan | Yes, as you repay |
The Hidden Risk of a Line of Credit
Flexibility is the biggest strength of a line of credit — and its biggest risk. Because minimum payments can be very low and there is no fixed end date, it is easy to carry a balance for years. If you use a line of credit, set your own repayment plan with a target payoff date, and treat it like a loan rather than extra spending money.
The Hidden Risk of a Personal Loan
With a personal loan, you pay interest on the entire amount from day one, even if you do not need all the money right away. Borrowing more than you need means paying interest on money that sits in your account. Some loans also charge a penalty for paying off early, so check the terms.
Secured Lines of Credit
Homeowners may qualify for a home equity line of credit (HELOC), which is secured by the home. HELOCs usually offer lower rates, but you are putting your home on the line. Only borrow against your home for purposes that genuinely add value, and have a clear plan to repay.
How to Decide
- Choose a personal loan if you know exactly how much you need and want a firm payoff date.
- Choose a line of credit if your costs are spread out or uncertain and you are disciplined about repaying.
- Compare the interest rate, fees and total cost of each option from more than one lender.
The Bottom Line
Neither option is always better. A personal loan offers structure and predictability; a line of credit offers flexibility. Match the product to how you will actually use the money, and always have a plan to pay it back.
This article is for general information only and is not financial advice.
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