The difference between a line of credit and a loan
A personal loan is closed-end: you borrow a set amount and repay it in scheduled payments over an agreed term until the balance reaches zero. A line of credit is open-end: you are approved for a limit, you draw what you need, and the room you repay becomes available again. The Financial Consumer Agency of Canada describes personal loans as money borrowed in a lump sum and repaid on a schedule, which is the clearest way to see the contrast.
Almost everything else follows from that structure. With a loan, the payment is set by the contract, so you know what leaves your account each month and when the debt ends. With a line of credit, the minimum payment is usually a percentage of the outstanding balance, so it rises as you draw and falls as you repay, and the account can stay open indefinitely.
Closed-end versus open-end
A closed-end loan is built for a defined purpose and a defined end date. An open-end line of credit is built for flexibility: it suits costs that arrive irregularly, or a buffer you want to keep for something unexpected. The trade-off is that flexibility has no finish line built into it, because nothing in a line of credit forces the balance to zero by a particular date.
Either product can be secured or unsecured. An unsecured version relies on your credit history and income. A secured version is backed by an asset, most often a home in the case of a home equity line of credit, and secured borrowing usually costs less because the lender holds a claim on that asset. The flip side is that the asset is exposed if your situation changes.
Why the cheaper-looking product is not always the cheaper one
What you pay to borrow is interest over time plus any fees, so a rate on its own tells you very little. You need three inputs: the rate, the balance, and how long the balance stays outstanding. Change any one of them and the cheaper-looking option can flip.
A line of credit often carries a lower rate than an unsecured personal loan, and that is usually where the comparison goes wrong. Revolving credit has no scheduled end date, and a minimum payment set at a small percentage of the balance is easy to carry for years. A loan at a slightly higher rate but with a fixed term can cost less in total, because the schedule removes the option of keeping the balance alive.
The opposite is also true. If you borrow for a few months and clear the balance, a line of credit can cost less, because you pay interest only on what you draw and only while you draw it, and you are not committed to a longer schedule. Short, sharp use tends to favour revolving credit. Long, slow repayment tends to favour a fixed schedule.
The lowest rates are only available to the most qualified applicants.
Rate type matters as much as rate level
Many lines of credit are priced in relation to a bank prime rate, which moves as the Bank of Canada policy interest rate moves. That means the cost of an outstanding balance can change without any change in your behaviour. A fixed-rate loan removes that uncertainty, and you generally pay something for it. Neither structure is universally better; they shift who carries the interest-rate risk.
There is also a hard legal ceiling on the cost of credit. The Criminal Code criminal rate of interest is 35% per year (s. 347).
Secured borrowing changes the stakes
A home equity line of credit is often the least expensive form of revolving credit, because it is secured by property. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending against the property usually capped at 80%. Moving unsecured debt onto a secured line lowers the rate and raises the consequences if your circumstances change.
Line of credit vs loan: a side-by-side comparison
| Feature | Personal loan | Line of credit |
|---|---|---|
| Structure | Closed-end: a set amount for a set term | Open-end: an approved limit you draw against |
| How the money arrives | A lump sum, usually once | Drawn as needed, up to the limit |
| Repayment | Scheduled payments fixed in the agreement | A minimum payment based on the balance; you choose anything above that |
| Interest rate type | Often fixed; variable versions exist | Often variable and tied to a prime rate; some fixed options exist |
| Monthly payment | Predictable for the life of the loan | Moves with your balance and the rate |
| Reuse | No; once repaid, the loan is finished | Yes; repaid room becomes available again |
| Security | Unsecured or secured | Unsecured, or secured by property in the case of a home equity line of credit |
| Main risk | Committing to payments that strain your budget | Keeping a balance outstanding far longer than planned |
| End date | Defined by the term | None, unless you close the account |
| Suits | One-time expenses with a known cost | Ongoing or unpredictable costs that need flexibility |
Read the table as a set of trade-offs rather than a scoreboard. Choosing between a personal loan vs line of credit is really choosing between a fixed schedule and a flexible limit, and both can be reasonable depending on what you are borrowing for.
How to choose
Work through the following before you apply anywhere.
- Match the product to the shape of the expense. If the cost is one-time and you know the amount, a closed-end loan with an end date tends to fit. If the need is ongoing or unpredictable, an open-end limit is more flexible.
- Compare total cost, not headline rate. Estimate what you would pay under each option over the timeline you would realistically take to repay, including any fees.
- Test the worst case. For a variable line of credit, ask what the payment looks like if the rate rises, and whether you could still manage it.
- Decide whether you want the debt secured. A secured line of credit may cost less, but the asset behind it is on the line.
- Check the effect on your overall debt load. Lenders look at how much of your income goes to debt payments. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, so adding a payment can affect what else you qualify for.
- Read the agreement before you sign. Look at how the minimum payment is calculated, whether the rate is variable, what fees apply, and how to close the account. Before you sign, it is worth reading the Financial Consumer Agency of Canada material on personal loans, which explains what your agreement should cover.
Regulation, credit reporting and benchmarks
Lending in Canada is licensed provincially, so the regulator and the rules differ depending on where you live and who you borrow from. Complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders.
Your credit history is reported through Equifax Canada and TransUnion Canada, and the two bureaus can hold different information about you. Negative items have set lifespans: a consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first, and a first bankruptcy stays on a credit report for 6 years after discharge. Only a licensed insolvency trustee can administer a consumer proposal or bankruptcy.
Rates you see quoted are usually benchmarks. The Bank of Canada publishes the policy interest rate, the prime rate, conventional mortgage rates and Government of Canada benchmark bond yields. These are benchmarks, not offers, and no lender is obliged to lend at them.
Short-term credit sits in its own regime. Where a province operates a licensed payday lending regime, the federal Payday Lending Regulations (SOR/2024-114) cap the cost of borrowing at $14 per $100 advanced. Some provinces set a payday cap lower than $14 per $100, and the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. A payday loan is generally up to $1,500 for a term of 62 days or less.
If your borrowing is secured against a home, two federal expectations are worth knowing. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and they qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25% under OSFI Guideline B-20. Canadian fixed-rate mortgages are compounded semi-annually by law, which is why a posted rate and an effective annual rate are not the same number.
Where loanmoose.ca fits
loanmoose.ca is not a lender. It does not make loans, set rates, or make credit decisions. What it does is help you compare the shape of the options available to you so you can ask better questions before you apply. Any rate, limit or term you are offered comes from the lender, not from this site, and it depends on your credit history, income, existing debts and that lender's own criteria.
For significant borrowing decisions, especially anything secured by your home or anything large enough to affect your budget for years, the right answer depends on your individual circumstances, and it is worth getting regulated professional advice before you commit.