A line of credit is a revolving borrowing facility with a set limit, an interest rate, and a balance you can draw down, repay, and draw down again. It is not a single lump sum paid out once. The lender approves an amount you may borrow up to, you use as much or as little of it as you need, and you pay interest only on the portion you have actually used.
That structure is what separates a line of credit from a personal loan, and its pricing is often what separates it from a credit card. The sections below explain how the product works, what secured and unsecured versions mean, and what to check before you sign a credit agreement.
How a line of credit works
Think of it as a pool of available credit rather than a single advance. Once the account is open, you can transfer money out, repay it, and use the same limit again. Interest is charged on the outstanding balance, usually from the day you draw the money until the day you repay it.
Most lines of credit carry a variable interest rate. The rate is set by the lender and tied to a reference rate, so your cost of borrowing moves when that reference rate moves. Some lenders offer fixed-rate portions or fixed-rate options, but variable pricing is the standard structure.
Payment terms vary by product and lender. Many accounts require a minimum monthly payment, often calculated as interest owing plus a small percentage of the principal. Others allow interest-only payments for a period. Paying only the interest keeps the payment low but leaves the balance where it is, which is how a flexible facility can quietly turn into long-term debt.
Secured and unsecured lines of credit
The main distinction is whether an asset backs the debt.
- Unsecured. No asset is pledged. Approval depends on your income, credit history, and existing debts, and the limit is usually smaller than a secured facility would allow. Because the lender takes on more risk, the interest rate is typically higher.
- Secured. The lender registers a claim against an asset, most often the equity in your home, which is why this version is commonly called a home equity line of credit. Because the borrowing is backed by property, the rate is usually lower and the limit higher. The trade-off is significant: if you cannot repay, the lender can take legal steps to recover the asset.
Secured accounts also come with costs that unsecured accounts often do not, such as property appraisal, title search, and registration or discharge fees when the account is opened or closed.
How interest is charged
Interest on a line of credit usually accrues daily on the outstanding balance and is posted to the account monthly. Your statement should show the rate, how it is calculated, and how the minimum payment is worked out. If the rate is variable, the payment amount or the payoff timeline changes when the reference rate changes, even if you do not borrow another dollar.
Canadian law sets an outer limit on the cost of credit. The criminal rate of interest is 35% APR, in force since 1 January 2025 under the Criminal Interest Rate Regulations (SOR/2024-114). An agreement priced above that threshold falls outside the law, which is why the effective annual cost of a facility matters more than the advertised monthly figure.
One tax point worth knowing: interest on money borrowed for personal spending is generally not deductible. If you borrow to earn business or investment income, different rules can apply. The Canada Revenue Agency publishes guidance on this, and it is a question for a tax professional rather than a loan comparison service.
Line of credit compared with a credit card and a personal loan
All three let you access money you have not saved, but they behave differently once the money is in your hands.
| Feature | Line of credit | Credit card | Personal loan |
|---|---|---|---|
| Structure | Revolving: reusable as you repay | Revolving: reusable as you repay | Instalment: advanced once, repaid on a schedule |
| Amount | Limit set by the lender, reviewed over time | Limit set by the lender, reviewed over time | Fixed at approval, then closed |
| Interest charged on | The outstanding balance, usually from the day of the draw | The outstanding balance; purchases may get a grace period, cash advances usually do not | The full principal, from the day it is advanced |
| Pricing | Usually variable; secured facilities are generally priced below unsecured ones | Varies by card; cash advances typically cost more than purchases | Fixed or variable, set when the loan is approved |
| Payments | Minimum payment, often interest plus a small principal portion | Minimum payment, often a small percentage of the balance | Fixed payments over a set term |
| Security | Unsecured, or secured against an asset such as home equity | Unsecured | Usually unsecured |
The practical difference is discipline. A personal loan forces repayment on a schedule. A revolving facility lets you decide how quickly to repay, which helps when the balance is genuinely temporary and hurts when it is not.
What a line of credit costs for small, short-term borrowing
For very short borrowing, a line of credit is often the least expensive option available. The Financial Consumer Agency of Canada compared the cost of borrowing $300 for 14 days across four products:
| Borrowing option | 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 loans sit in a separate category of regulation, and the gap above shows why. Nine provinces have a payday lending regime, and Quebec effectively prohibits payday loans. Where they are permitted, the maximum cost of borrowing is $14 per $100 borrowed, the maximum advance is $1,500, the maximum term is 62 days, and the maximum dishonoured-payment fee is $20.
What to check before you apply
- The rate and how it moves. Confirm whether it is fixed or variable, which reference rate it follows, and how often it can change.
- Minimum payment rules. Ask what the minimum is, whether any principal repayment is required, and what happens if you pay only that amount for a long period.
- Fees. Look for annual or administration fees, inactivity fees, charges to increase your limit, and registration or discharge costs on secured accounts.
- Security. If the account is secured, understand exactly which asset is pledged and what the lender can do if you miss payments.
- Demand clauses. Some agreements let the lender reduce your limit or require repayment in full under certain conditions. Those clauses deserve a careful read.
- Credit file impact. Applying usually triggers a credit check, and carrying a high balance relative to your limit can affect how lenders assess you later.
A line of credit is a tool, not a plan. It suits expenses you expect to repay within a defined period, and it suits them badly when it becomes a way to cover a persistent shortfall between income and spending.
Sources and further reading
- Financial Consumer Agency of Canada, for consumer information on loans, credit and debt.
- Criminal Code, section 347, which sets the criminal rate of interest.
- Criminal Interest Rate Regulations (SOR/2024-114), in force since 1 January 2025.
This article is general information only and is not financial, legal, or tax advice. Instalment.ca is a loan matching and comparison service, not a lender.