Personal loan vs line of credit: how to choose

A personal loan gives you one lump sum with a set repayment schedule. A line of credit gives you a limit you can draw from, repay and draw from again, with interest charged only on the balance you actually use. If you are covering a single, known expense, a personal loan is usually the cleaner fit. If the amount or the timing is uncertain, a line of credit usually is. The rest of this guide is the reasoning behind that answer.

One thing up front, because it matters: LoanGoose is a loan matching and comparison service, not a lender. We do not make loans, set rates or make credit decisions, and nobody can promise you a specific rate or an approval before a lender assesses your file.

What a personal loan actually is

A personal loan is an installment loan. You borrow a fixed amount and repay it, with interest, in scheduled payments over a fixed term. The amount, the payment and the finish line are all known on day one, which makes it straightforward to budget around.

It can be secured or unsecured. Unsecured means the lender leans on your credit history and income. Secured means you pledge an asset, such as a vehicle or savings, which may lower the cost but puts that asset at risk if you stop paying.

What you are offered depends on your credit history, your income, the lender and whether the loan is secured. The Financial Consumer Agency of Canada's overview of personal loans sets out what lenders look at when they assess an application.

What a line of credit actually is

A line of credit is revolving credit. The lender sets a limit. You draw what you need, when you need it, and pay interest on the outstanding balance, usually calculated daily. As you repay, the room comes back and you can use it again.

There are two broad types. An unsecured line of credit is granted on creditworthiness alone. A home equity line of credit is secured against your property, which generally means a lower rate, because the lender holds collateral.

That collateral comes with rules. At federally regulated lenders, a home equity line of credit is generally limited to 65% of the appraised value of the property, and total secured lending against a home is usually capped at 80%; the FCAC's mortgage guidance and OSFI Guideline B-20 explain how lenders are expected to apply those limits.

One quiet detail worth knowing: Canadian fixed-rate mortgages are compounded semi-annually by law, which is one reason a mortgage rate and a line of credit rate are not directly comparable numbers even when they look close.

Personal loan vs line of credit, side by side

What each one really costs

Neither product has a single sticker price. The cost depends on your credit history, your income, whether the borrowing is secured, the lender and the term. What you can do is compare the total: not just the rate, but any fees, optional insurance, and how long you would be paying.

A fixed installment loan is easy to total up, because the payment and the term are both fixed. A line of credit is harder, because the balance moves. If you pay only the minimum, you can carry a balance for a long time without noticing how long.

There is a hard ceiling in Canadian law. The Criminal Code sets the criminal rate of interest at 35% per year, and it defines the method that aggregates interest and certain charges when a loan is tested against that limit; Criminal Code section 347 is the provision itself.

For very small, very short borrowing, the payday loan is a separate product with its own rules: generally up to $1,500 for a term of 62 days or less, as the FCAC page on payday loans explains. Where a province operates a licensed payday lending regime, federal regulations cap the cost of borrowing at $14 per $100 advanced, and a province may set a lower cap; the Payday Lending Regulations, SOR/2024-114 set that cap. Quebec does not license payday lending, which effectively prohibits the model there.

Which one fits your situation

• One known expense with a known date, such as a planned purchase or a tax bill: a personal loan.
• A renovation whose scope keeps changing: a line of credit, so you are not paying interest on money you have not spent yet.
• A short gap between income and expenses, with a clear plan to repay: a line of credit can work.
• Consolidating several debts: either can work, but a fixed loan forces a finish line that revolving credit never does.
• Borrowing again next year for something similar: a line of credit saves you a fresh application.
• Knowing you would spend an open limit: a personal loan's schedule protects you from the version of you that shops at 11 p.m.

If the borrowing is secured against your home, the lender has to qualify you under federal mortgage rules. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44% and apply a qualifying stress-test rate above the contract rate, as set out in OSFI Guideline B-20. Ask what happens to the house if things go wrong. That is not a dramatic question; it is the question.

How both show up on your credit report

Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a free copy of your credit report is available from each, as the FCAC's credit report and score guidance explains. Applying for either product usually means a credit check, and the payment history that follows stays visible for years.

If repayment goes badly wrong, the tools get formal. Only a licensed insolvency trustee can administer a consumer proposal or a bankruptcy, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. A consumer proposal stays on your credit report for three years after completion, or six years from filing, whichever comes first. A first bankruptcy stays for six years after discharge.

If something goes wrong with the lender

Complaints about federally regulated financial institutions are handled by the Financial Consumer Agency of Canada. Most other lenders are licensed and supervised by provinces, and each province has a consumer protection office; the FCAC keeps a list of provincial and territorial regulators. If you are worried about how a lender handled your personal information, the Office of the Privacy Commissioner of Canada is the body to contact.

A short checklist before you sign

1. Ask for the total cost of borrowing, not just the interest rate.
2. Confirm whether the rate is fixed or variable, and what makes it change.
3. Ask whether the line of credit can be reduced, frozen or called, and on what notice.
4. Check for mandatory insurance, administration fees and any prepayment penalty.
5. Confirm exactly what you are pledging, if anything, and what you lose by defaulting.
6. Get the terms in writing before you commit. The FCAC's debt and borrowing guidance is a good second read.

Big decisions, such as borrowing against your home, consolidating debt or anything touching insolvency, deserve a licensed professional: a mortgage professional, a licensed insolvency trustee or a fee-only financial planner. Your circumstances decide this, not a comparison table.

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