The main difference between a line of credit and a personal loan is structure: a line of credit is revolving credit you can draw on, repay, and draw on again, while a personal loan is a single lump sum paid out once and repaid in set instalments over a fixed term. Which one costs less depends less on the product name and more on how much you borrow, how long you need the money, and whether you want a fixed repayment schedule.
How the two products are structured
A line of credit is revolving credit. The lender approves a limit, you draw what you need when you need it, and interest applies only to the outstanding balance rather than the full limit. As you repay, the available credit comes back. Most lines of credit have no fixed end date, and many lenders reserve the right to reduce, suspend, or cancel the limit, or to demand repayment.
A personal loan is closed-end credit, which is why it is often called an instalment loan. You receive the full amount up front and repay it in a set number of payments over a set term, usually monthly. When the term ends, the loan is finished and the account closes. Borrowing again means applying again and being assessed again.
Both products come in secured and unsecured versions. A secured line or loan is tied to an asset, often home equity or a vehicle, which lowers the lender's risk and tends to be reflected in a lower rate. Unsecured borrowing rests on your credit history and income alone.
Rate type: variable, fixed, or a mix
Lines of credit almost always carry a variable rate, typically quoted as a spread above the lender's prime rate. When prime moves, your interest cost moves with it. That works in your favour when rates fall and against you when they rise, and it makes long-term budgeting less predictable.
Personal loans may be fixed or variable. A fixed-rate personal loan locks the rate for the full term, so the total cost of borrowing is known before you sign. That certainty usually comes at a slightly higher starting rate than a variable product.
One limit applies to all lending in Canada. The federal criminal rate of interest is 35% APR, in force since 1 January 2025 under the Criminal Interest Rate Regulations. An agreement that exceeds that threshold is not ordinary borrowing cost.
Repayment, discipline, and how the balance behaves
A personal loan imposes structure. Payments arrive on a schedule, each one reduces principal as well as interest, and the debt ends on a date you can circle on a calendar. That makes it easier to plan around.
A line of credit offers flexibility but rarely compels repayment of principal. Many lenders accept interest-only or minimum payments, which keeps the account in good standing while the balance stays roughly where it started. Used that way, a line can stay open for years and cost far more in total than a loan with a higher headline rate.
There is a second behavioural difference. Because the limit refills as you repay, a line of credit can quietly become a permanent fixture rather than a short-term tool. If you intend to use one for a project, decide in advance how quickly you will clear it, and treat that target as part of the plan.
Comparing the two side by side
The table below sets out the practical differences. Compare total cost of borrowing rather than the advertised rate alone, because the two can point in opposite directions.
| Feature | Line of credit | Personal loan |
|---|---|---|
| Credit type | Revolving | Closed-end |
| How funds arrive | Drawn as needed, up to a limit | One lump sum at the start |
| Interest charged on | Outstanding balance only | Full principal, paid down over the term |
| Rate type | Usually variable | Fixed or variable |
| Repayment | Flexible minimums, often interest-only | Set instalments on a schedule |
| Term | Often open-ended; limit can be changed or called | Fixed term with a defined end date |
| Cost certainty | Lower, because the rate and balance move | Higher with a fixed rate |
| As you repay | Available credit returns | Balance falls; credit does not return |
| Best suited to | Short, irregular, or standby borrowing | Defined purchases and debt consolidation |
| Main risk | Balance never fully repaid | Paying for certainty you do not need |
Beyond the table, get answers to these questions in writing before you sign either product:
- Is the rate fixed or variable, and what is the annual percentage rate?
- What fees apply? Look for annual fees, inactivity fees, origination or administration fees, and prepayment penalties.
- How long is the term, and can the lender change the limit, change the rate, or demand repayment?
- How is interest calculated, on a daily balance or on a fixed schedule?
- What happens if you pay early, pay extra, or miss a payment?
Why the cheaper option depends on amount and time
Three variables usually settle the question.
Amount. For small, short-term needs, a line of credit usually costs less because you pay interest only on what you draw, and there is often no origination fee. The Financial Consumer Agency of Canada's comparison of borrowing $300 for 14 days shows how sharply short-term options differ: a payday loan cost $42.00, a credit card cash advance $7.65, overdraft protection $7.42, and a line of credit $5.92. For larger amounts, a fixed-rate personal loan becomes more competitive, because the lender can price a defined amount over a defined term precisely.
Time. The longer you carry a balance, the more the flexibility of a line of credit works against you. A fixed instalment schedule guarantees that principal falls every month. A revolving limit guarantees nothing. Over a long horizon, that difference often outweighs a small gap in interest rates.
Rate direction. If rates are rising, a fixed-rate personal loan protects your budget and your total cost. If rates are falling, a variable line of credit may cost less over the same period. Nobody can predict which way rates will move, so the decision usually comes down to how much certainty you want to buy.
Best use for each product
A line of credit suits borrowing that is irregular or short-lived:
- Covering a temporary gap between expenses and income
- Funding a renovation or repair in stages, with repayment planned over months rather than years
- Keeping a standby buffer for emergencies instead of relying on a credit card
A personal loan suits borrowing with a known amount and a planned finish:
- Consolidating several debts into one fixed payment
- Buying a specific item or paying for a defined project
- Any situation where a fixed payment and an end date matter more than flexibility
Either way, borrow only what you can service, and read the agreement before signing. If you are comparing offers, Instalment.ca can match your request with lenders in its network, though approval, rates, and terms are always decided by the lender.
Sources and further reading
- Financial Consumer Agency of Canada: loans and borrowing
- Criminal Code, section 347: criminal rate of interest
- Criminal Interest Rate Regulations (SOR/2024-114)
- Financial Consumer Agency of Canada: payday loans and short-term credit
This article is general information, not financial, legal, or tax advice, and Instalment.ca is a loan matching and comparison service, not a lender.