A line of credit and an instalment loan are both ways to borrow, but they behave in opposite ways. A line of credit gives you a reusable limit and you pay interest only on what you draw, so the balance and the payment can change each month. An instalment loan gives you a lump sum that you repay in fixed payments over a set term, so the payment and the end date are known from the start. Which one fits depends on whether your need is ongoing or one-time.
How a Line of Credit Works
You are approved for a limit, and you can draw on it, repay it, and draw again as long as the account stays open. Interest is charged on the outstanding balance, usually daily. A secured line of credit, such as a HELOC, is backed by an asset and carries a lower rate. An unsecured line of credit relies on your credit and income and costs more. Because the balance can stay open indefinitely, a line of credit can quietly become permanent debt if you only pay the interest.
How an Instalment Loan Works
You borrow a fixed amount and repay it in equal payments over a set term. Each payment covers interest and principal, and the loan reaches zero on the final due date. The rate may be fixed or variable. Because the schedule forces you to pay down principal, an instalment loan has a built-in finish line that a line of credit lacks.
| Feature | Line of credit | Instalment loan |
|---|---|---|
| Structure | Revolving limit | Fixed lump sum |
| Payment | Varies with the balance | Same amount each period |
| End date | None until you close it | Set at the start |
| Interest | Charged on what you draw | Charged on the declining balance |
| Best for | Variable or recurring needs | One-time, planned expenses |
Cost Compared
Lines of credit often carry a lower interest rate than unsecured instalment loans, especially when secured. But a lower rate on a balance you never pay down can cost more over time than a higher rate on a loan you clear on schedule. The Financial Consumer Agency of Canada found that borrowing $300 for 14 days on a line of credit cost about $1.15 to $5.81, far less than a payday loan at about $42 to $63. That comparison shows the value of a low-rate revolving option for short gaps, not a reason to carry a balance for years.
When a Line of Credit Is Better
- Your need is unpredictable, such as occasional business or cash-flow gaps.
- You can repay what you draw within a short period.
- You want the flexibility to borrow again without reapplying.
- You qualify for a secured rate that is clearly below unsecured options.
When an Instalment Loan Is Better
- You have a defined cost and a clear repayment timeline.
- You want a fixed payment that does not move with rates.
- You need the discipline of a schedule that pays the debt down.
- You are consolidating debt and want a single, finite commitment.
Watch Out For
A line of credit with interest-only payments can drift for years. If you are using one to fund a lifestyle rather than a temporary gap, an instalment loan may be the better structure because it forces repayment. On the other hand, an instalment loan for a recurring need can mean repeated applications and fees. Match the tool to the need, and check whether the rate is fixed or variable before you commit.
How to Decide
Start with the nature of the need. If it is a single expense with a known cost, an instalment loan gives you a fixed payment and a finish line. If it is an ongoing or unpredictable need, a line of credit gives you flexibility without repeated applications. Then check the rate and whether it is fixed or variable. Finally, be honest about your habits. If you tend to carry a balance, the structure that forces repayment is the safer choice, even if its rate is a little higher. The cheapest rate on paper is not the cheapest loan if you never pay it down.
Sources and further reading
- Financial Consumer Agency of Canada, for guidance on lines of credit, loans, and borrowing costs.
- Bank of Canada, which publishes interest rate information relevant to variable-rate products.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.