Interest on a line of credit in Canada is normally calculated as a variable annual rate applied to your outstanding balance each day, then added to what you owe at the end of each statement period. Because a line of credit is revolving, the balance rises when you draw on it and falls when you repay, so the interest charged is never a fixed amount. It depends on three things: how much you owe, how many days you owe it, and the rate in effect on each of those days.
How the rate on a line of credit is set
Most lines of credit carry a variable rate. The credit agreement expresses it as a spread over the lender's prime rate, such as prime plus a fixed number of percentage points. The prime rate is set by the lender, not by the government, but the major Canadian lenders' prime rates have historically moved together when the Bank of Canada changes its target for the overnight rate. That is why a change announced by the Bank of Canada usually shows up in the rate on a variable-rate line of credit within a short time.
Whether the line is secured matters. A secured line, such as a home equity line of credit registered against your home, usually carries a lower spread than an unsecured line, because the lender has collateral to fall back on if you do not repay. A secured line may also allow a larger limit.
Federal law also sets an outer limit on the cost of borrowing. Since 1 January 2025 the criminal rate of interest has been 35 per cent APR under the Criminal Interest Rate Regulations. That ceiling applies to the total cost of borrowing, not only to the stated interest rate.
Calculated daily, charged at the end of the period
Interest on a line of credit is worked out day by day. For a single day, the arithmetic is the annual rate divided by the number of days in the year, multiplied by the balance owed that day. Those daily amounts are added up over the statement period and charged to the account. Your agreement will say whether the lender uses your closing balance each day or an average daily balance, and most use the daily balance.
Two things follow from daily calculation. First, interest starts accruing as soon as you draw on the line, and there is no interest-free grace period the way there can be on credit card purchases when you pay the balance in full. Second, every day the money is outstanding costs something, so the timing of a payment matters as much as the size of it.
A useful rule of thumb: interest for a period is proportional to the balance and to the number of days. Halve the balance and you roughly halve the interest for those days. Cut the number of days in half and you do the same. Paying early in a statement period rather than on the due date keeps the balance lower for more days and therefore costs less.
How your payments are applied
The credit agreement sets out how the minimum payment is calculated. On many lines of credit it is the interest that has accrued during the period plus a percentage of the principal, subject to a minimum dollar amount. On others, especially unsecured lines, the minimum may be expressed as a percentage of the outstanding balance.
In general, a payment is applied first to the interest that has accrued since the last statement, and whatever is left reduces the principal. That order matters. If your payment only covers the accrued interest, the principal stays where it was, and next month the same balance generates a similar interest charge. The line does not pay itself down.
Payments made between statement dates also count. Because interest is calculated on the daily balance, a payment partway through the period lowers the balance for every day that follows until the statement date. The money is not held aside until the statement is issued.
Why paying more than the minimum saves money
Every dollar of principal you clear is a dollar that stops generating daily interest. A lower balance produces a smaller interest charge, which means a larger share of the next payment goes to principal, which lowers the balance further. This is the same mechanic that makes a mortgage amortise over time.
There is a second reason to pay aggressively on a line of credit. Because the limit is revolving, repaid principal becomes available credit again, which is convenient but also easy to reuse. A line that is paid down and then redrawn can sit at roughly the same balance for years, with interest charged on it the whole time.
What happens when rates change
On a variable-rate line of credit, a change in the lender's prime rate changes the rate on your whole outstanding balance, not just on new borrowing. If prime rises, one of two things happens, depending on how your minimum payment is defined:
- If the minimum payment is tied to the interest owing, the minimum rises, and the amount you must pay each period goes up.
- If the minimum is a percentage of the balance or a fixed dollar amount, the payment may not change, but more of it goes to interest and less to principal, so the balance falls more slowly.
When prime falls, the reverse happens: either the minimum drops, or more of the same payment attacks the principal. Some lines of credit, particularly home equity lines, let you convert part of the balance into a fixed-rate portion with a set payment and term. That removes the rate uncertainty on that slice of the debt, but it usually means you cannot redraw it.
Comparing the cost of a short-term advance
For small amounts borrowed briefly, the product you use matters more than the rate. The Financial Consumer Agency of Canada compares the cost of borrowing $300 for 14 days across four products:
| 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 |
The table compares cost only. It does not tell you whether you qualify for each product, how quickly you can access it, or what happens if the balance is not repaid when expected. Payday loans are capped by provincial rules at a maximum cost of borrowing of $14 per $100 borrowed, a maximum advance of $1,500, a maximum term of 62 days and a maximum dishonoured-payment fee of $20. Nine provinces have a payday lending regime, and Quebec effectively prohibits payday loans.
For longer-term borrowing, a secured line of credit is often the cheapest form of revolving credit because the rate is tied to prime and the loan is backed by an asset. The trade-off is that the asset is at risk if you do not keep up with payments.
Sources and further reading
- Financial Consumer Agency of Canada: Lines of credit
- Bank of Canada: Policy interest rate
- Criminal Interest Rate Regulations, SOR/2024-114
- Financial Consumer Agency of Canada: Payday loans
This article is general information only and is not financial, legal or tax advice, and Instalment.ca is a loan matching and comparison service, not a lender.