Personal Loan vs Line of Credit: Which Fits Your Situation?

A personal loan pays you a lump sum with fixed instalments, while a line of credit lets you draw funds as needed. The right choice depends on the expense.

By Promissory.ca Editorial Team Reviewed against official Canadian sources Last updated: 2026-09-16

The short answer

A personal loan hands you a fixed amount that you repay on a set schedule, so you know exactly what you owe each month and when the debt ends. A line of credit is revolving: it approves a limit, you draw what you need, and you pay interest only on the balance you use. One is built for a defined expense; the other is built for flexibility.

Some borrowers end up using both. A loan can cover a known expense while a line of credit sits available for the unexpected. That combination can work well, provided you track the total you owe rather than treating the two accounts as separate.

How a personal loan works

With a personal loan, you and the lender agree on an amount, a term, and a payment schedule. The money is advanced once, and each instalment chips away at both the interest and the principal. Once the final payment clears, the account closes and the relationship ends.

Because the structure is fixed, budgeting is straightforward. You can plan around a payment that will not change unless you and the lender agree to renegotiate. The trade-off is inflexibility: if you need more money later, you generally have to apply for another loan, and if you repay early you may face a prepayment penalty depending on the agreement.

How a line of credit works

A line of credit sets a maximum you can borrow. You draw funds when you need them, up to that limit, and you can repay and re-borrow as you go. Interest is charged on the outstanding balance, often calculated daily. This makes a line of credit useful when the timing or size of an expense is uncertain.

The risk is that a revolving balance can linger. Because the minimum payment is often small and the credit stays available, it is easy to repay slowly and keep using the line. A line of credit rewards discipline and punishes drift.

Side by side

How the costs differ

Both products are priced against the same legal ceiling. The Criminal Code caps the criminal rate of interest at 35% APR, reduced from 48% on 1 January 2025, so no lender can charge more than that. Within the ceiling, the rate you are offered depends on your credit, the lender, and whether the credit is secured.

The comparison that matters is not the headline rate but the total cost. A personal loan charges interest on the full amount for the whole term, so a lower rate can still cost more than a line of credit if you would only have drawn part of the money. A line of credit can cost less when you repay quickly, but more when a balance sits for years. Run both scenarios through a calculator before deciding.

Fees also differ. Loans may carry an origination or administration fee, and some charge a prepayment penalty. Lines of credit may have an annual fee or a fee for inactivity. The APR folds certain fees into a single comparable number, which is why it is a better yardstick than the interest rate alone.

When a personal loan makes more sense

• You are funding a one-time expense with a known price, such as a kitchen renovation or a wedding.
• You want a guaranteed end date so the debt does not become a permanent feature of your budget.
• You prefer a fixed payment that is easy to plan around.
• You are consolidating several debts and want one predictable payment.

When a line of credit makes more sense

• Your expenses arrive at unpredictable times, such as a contractor billing in stages.
• You want a safety net for irregular costs and would rather not borrow until you need to.
• You can repay quickly and want to pay interest only on what you actually use.
• You value the ability to re-borrow after repaying without a new application.

Secured lines of credit and home equity

Some lines of credit are secured against an asset, most commonly a home. A home equity line of credit can carry a lower rate than an unsecured line because the lender has collateral. The trade-off is serious: if you cannot repay, the asset backing the credit is at risk. Secured borrowing is not automatically better, and it deserves a clear-eyed look at what you could lose.

How to choose

1. Define the expense. If it is a fixed amount at a known time, a loan usually fits. If it is open-ended, a line of credit usually fits.
2. Estimate your repayment. Be honest about how quickly you can clear the balance. The faster you repay, the more a line of credit tends to reward you.
3. Compare total cost, not the rate. Ask each lender for the APR and any fees, and compare like with like.
4. Check the flexibility terms. Look for prepayment penalties on loans and annual or inactivity fees on lines of credit.
5. Read the agreement. Confirm whether the credit is secured, what happens if you miss a payment, and how the rate can change.

It also helps to think about how you would behave if the balance were available to re-borrow. If the answer is that you would be tempted to spend it back up, a loan with a fixed end date provides a useful boundary. If you would use the flexibility carefully, a line of credit can be the more efficient tool.

Neither product is universally cheaper. The better choice is the one whose structure matches how you will actually use and repay the money.