A line of credit is a revolving loan: you draw money up to an approved limit, interest accrues only on the amount you have actually used, and every dollar you repay becomes available to borrow again. That single feature, reuse, explains most of the difference between a line of credit and an instalment loan.
What revolving credit means in practice
When a lender approves a line of credit, it sets a limit and opens an account rather than advancing a lump sum. Nothing is owed until you draw on it. If the limit is $10,000 and you have drawn $2,500, the available credit is $7,500, and interest is charged only on the $2,500.
As you repay, the available credit grows back. This is the revolving part: money moves in both directions for as long as the account stays open. There is generally no fixed payoff date and no schedule of equal payments that forces the balance to zero in a set month.
Lines of credit come in a few shapes. A personal line of credit is usually unsecured. A home equity line of credit is secured by your home. Some lenders combine a mortgage and a line of credit under one limit, which can make borrowing easy to overlook. The credit agreement, not the marketing material, defines what you have.
How interest is calculated on a line of credit
Interest on most lines of credit is calculated daily on the outstanding balance and charged to the account, usually once a month. The daily charge is roughly the balance multiplied by the annual rate and divided by the number of days in the year. Two things follow. Interest depends on how long the money is outstanding, so an early repayment saves a little and a late draw costs more. And because the calculation runs daily, the timing of draws and payments within a month changes the total charged.
Most personal lines of credit carry a variable rate tied to a benchmark named in the agreement, which also explains how and when the rate changes. The Bank of Canada publishes its policy interest rate, a common reference point in the market, but the rate on your account is the one written in your agreement.
Since 1 January 2025, the federal criminal rate of interest is 35% APR, set by the Criminal Interest Rate Regulations (SOR/2024-114). Charging a cost of credit above that threshold is a criminal offence under section 347 of the Criminal Code, subject to narrow exceptions. That is a legal ceiling on the most expensive credit, not a benchmark of what is fair and not a prediction of the rate you will be offered.
Unpaid interest is normally added to the balance, so the next month's interest is calculated on a slightly larger amount. Left alone, that is how a line of credit can sit near the same balance for years while the borrower pays something every month.
Minimum payments and how the balance behaves
The minimum payment is defined in the credit agreement. It is usually a small percentage of the balance, or the interest owing plus a portion of the principal. Because there is no amortization schedule, the minimum keeps the account in good standing without committing you to any particular payoff date.
- Paying only the minimum leaves most of the balance in place, so interest keeps running on nearly the same amount.
- Paying more than the minimum reduces principal, which lowers every future daily interest charge.
- Paying earlier in the billing cycle reduces the number of days the balance sits at its higher level.
- Missing a payment can trigger fees, a higher rate, or a demand for repayment, depending on the terms.
Lenders also review these accounts over time. A limit can be frozen or reduced, and the agreement normally sets out when the lender can demand repayment. A line of credit is a facility that can be withdrawn, not an entitlement for life.
Secured and unsecured lines of credit
An unsecured line of credit is granted on the strength of your income, credit history and existing debts, with no asset pledged. A secured line of credit is backed by collateral, most often the equity in your home. That difference drives the rate, the size of the limit and the risk you carry.
| Feature | Unsecured line of credit | Secured line of credit |
|---|---|---|
| Collateral | None pledged | Registered against an asset, usually a home |
| Rate | Generally higher, reflecting the lender's risk | Generally lower, because security is held |
| Limit | Usually smaller | Often larger, tied to available equity |
| If you default | The debt remains collectable | The lender can enforce against the asset |
| Extra steps | Application and credit check | Appraisal and registration on title |
A home equity line of credit turns housing equity into spending capacity, which is why it needs a clear repayment plan. Registration and discharge of the security follow provincial property rules, so paperwork and costs vary by province or territory.
How a line of credit differs from an instalment loan
| Line of credit | Instalment loan | |
|---|---|---|
| How funds are advanced | As needed, up to the limit | Once, as a lump sum |
| Reuse | Repaid amounts are available again | No, a new application is needed |
| Repayment | Minimum set by the agreement, no fixed end date | Fixed schedule over a set term |
| Payment size | Varies with the balance and the rate | Set at the start, so the cost is predictable |
| Best suited to | Ongoing, uneven or emergency costs | A defined purchase with a defined payoff |
An instalment loan fits when you know the amount, the purpose and the date you want to be finished. A line of credit fits when the need is recurring or uncertain, provided you have a plan to clear the balance rather than treat the limit as income.
What to check before you draw
Cost matters most for small, short borrowing. The Financial Consumer Agency of Canada compared what it costs to borrow $300 for 14 days across four products, and the spread is wide.
| Product | Cost of borrowing $300 for 14 days |
|---|---|
| Payday loan | $42.00 |
| Cash advance on a credit card | $7.65 |
| Overdraft protection on a chequing account | $7.42 |
| Line of credit | $5.92 |
Payday lending sits under its own rules: a maximum cost of borrowing of $14 per $100, a maximum advance of $1,500, a maximum term of 62 days and a maximum dishonoured-payment fee of $20. Nine provinces operate a payday lending regime, and Quebec effectively prohibits payday loans. Those rules do not apply to lines of credit.
Before you draw, read the agreement and get clear answers to a few questions.
- Is the rate fixed or variable, what benchmark does it follow, and how often can it change?
- How is the minimum payment calculated, and how much of it goes to principal?
- What fees apply: annual, inactivity, transaction, or costs to register and discharge security?
- Is the line secured, and what exactly does the lender hold?
- Under what conditions can the lender reduce the limit, raise the rate or demand repayment?
- How will a large outstanding balance affect your credit utilization and, over time, your credit score?
Sources and further reading
- Financial Consumer Agency of Canada: loans, lines of credit and borrowing basics
- Criminal Code, section 347: criminal rate of interest
- Criminal Interest Rate Regulations, SOR/2024-114
- Bank of Canada: policy interest rate
This article is general information only, not financial, legal or tax advice, and Instalment.ca is a loan matching and comparison service, not a lender.