How Does Line of Credit Interest Work in Canada?

How does line of credit interest work? You pay interest only on the money you actually draw, and it starts building from the day you spend it — not the day your statement arrives. Your limit isn't the thing being charged. Your balance is. That one difference explains why a line of credit behaves nothing like a car loan or a mortgage, and why it can be either the cheapest borrowing you have or the slowest debt you ever pay off.

LoanGoose is a loan matching and comparison service, not a lender. We don't set rates, we don't approve applications, and we don't make credit decisions. What follows is how the mechanics work in Canada, so you can ask sharper questions before you sign anything.

What you're actually being charged for

A line of credit is revolving credit. You get a limit, you draw what you need, you pay it back, and the room opens up again. Because the balance rises and falls, the lender can't simply charge you one flat interest figure for the year. It has to measure what you owe, day by day.

So that's what it does. The lender takes your closing balance for each day in the statement period, applies a daily interest rate derived from your annual rate, and adds those daily amounts together. At the end of the period, the total shows up on your statement as interest. Pay part of the balance down mid-month and the charges after that payment are smaller. Draw more, and they grow.

If you want the regulator's plain-language version of how personal borrowing works, the Financial Consumer Agency of Canada lays out the basics at FCAC — personal loans.

Why the minimum payment is a trap

Most lines of credit let you choose your payment above a minimum. That flexibility is both the feature and the hazard. The minimum is often small — sometimes barely more than the interest that accrued that month, plus a sliver of principal.

When that happens, you're renting the debt rather than retiring it. The balance barely moves. You feel like you're paying something every month, and you are, but you're mostly paying for the privilege of still owing the money.

A useful habit: decide the payment before you draw, not after. If you can't say what you'll pay each month, you're not really planning to repay it.

What moves your rate

Lines of credit are usually priced off the lender's prime rate, plus or minus a margin based on how risky you look to them. Prime itself generally shifts when the Bank of Canada moves its policy rate — you can watch those movements at Bank of Canada — rates. If your line is variable, your cost changes without anyone asking you.

• Secured or unsecured. A line secured by home equity usually prices lower than an unsecured line, because the lender has something to recover.
• Your credit history. Payment history, how long you've held accounts, and how much of your available credit you use all feed into the assessment.
• Income and debt load. Lenders look at what you owe against what you earn.
• The lender's own appetite. Two institutions can offer very different margins on the same day to the same person.

Line of credit versus instalment loan

The mechanics diverge in ways that matter more than the headline rate.

Notice that the line of credit wins on flexibility and can lose badly on discipline. A fixed loan forces the ending. A line of credit waits for you to choose one.

The ceiling: the criminal rate of interest

Canada has an outer limit. Section 347 of the Criminal Code sets the criminal rate of interest at 35% per year, in force since 1 January 2025, calculated by a defined method that aggregates interest and certain charges — the details are at Criminal Code s. 347 — criminal rate of interest.

That ceiling is a backstop, not a target. Plenty of legal borrowing sits far below it and is still a poor deal for you.

Payday lending sits in its own lane. A payday loan is generally up to $1,500 for a term of 62 days or less. Where a province operates a licensed payday lending regime, federal regulations cap the cost of borrowing at $14 per $100 advanced; a province may set a lower cap, and the lower figure applies — see the Payday Lending Regulations, SOR/2024-114. Quebec does not license payday lending, which effectively prohibits the model there.

If you're weighing a payday loan against a line of credit, the FCAC — payday loans page is worth ten minutes before you decide.

If your line of credit is secured by your home

A home equity line of credit is a different animal, because your house is the collateral. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. Those mortgage files are also underwritten against a total debt service ratio ceiling of about 44% and a qualifying stress-test rate above the contract rate, under OSFI Guideline B-20.

Here's the honest trade-off. Secured borrowing is cheaper. It also converts unsecured debt into debt backed by the roof over your head. If your income wobbles, the consequence is no longer a collections call — it's your home. That's a heavy trade for a lower rate.

When a line of credit is the wrong tool

• Funding a lifestyle gap you expect to be temporary. It rarely is.
• Covering interest with more borrowing — the balance becomes self-feeding.
• Paying down a card and then running the card back up. Now you have two balances.
• Treating it as an emergency fund with no repayment plan attached.
• Carrying it indefinitely while calling it "flexible."

If debt has already outrun your ability to repay it, the answer isn't another line. In Canada, only a licensed insolvency trustee can administer a consumer proposal or bankruptcy, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. A consumer proposal stays on a credit report for three years after completion, or six years from filing, whichever comes first; a first bankruptcy stays for six years after discharge. Those are real costs, and they're still sometimes the least bad option.

Check your file, know your recourse

Canada has two national credit reporting bureaus — Equifax Canada and TransUnion Canada — and a free copy of your credit report is available from each. The FCAC — credit reports and scores page explains how to order them. Read both; they don't always agree.

If something goes wrong with a lender, the FCAC — complaints process handles federally regulated financial institutions, while provinces license and supervise most other lenders, and each has a consumer protection office. The FCAC — provincial and territorial regulators page will point you to yours.

Before you draw a dollar

Ask three questions. Is the rate fixed or variable, and what makes it move? What's the minimum payment, and what would I need to pay to clear this in a set time? And if this is secured, what do I lose if I can't pay? For anything significant — especially borrowing against your home — talk to a licensed professional who can look at your whole picture. This article explains mechanics, not your situation.

LoanGoose is a loan matching and comparison service, not a lender. The lowest rates are only available to the most qualified applicants.