Amid ever-changing economic dynamics, managing your finances with flexibility is as important as ever.
For Canadians looking for a reliable way to access cash for home repairs to emergency expenses, a line of credit (LOC) offers a versatile and convenient solution.
In this guide, we’ll explore how a line of credit works, how to qualify, how to use it wisely, and how it compares with other borrowing options.
Key Features Of A Line of Credit
| Credit Limit | Your line of credit limit could range from as little as $5,000 to over $100,000, depending on your finances, credit, lender and collateral (optional). |
| Interest Rate | Lines of credit usually carry variable interest rates, which are tied to the lender’s prime rate. The current prime rate in Canada is 4.95%. Lenders will generally charge you rates starting from prime plus a premium (ex: prime + 2%) |
| Term | Lines of credit do not have a set term. They are open-ended loans that can be repaid at any time. |
| Repayment | Lenders generally require a minimum monthly payment equal to the interest portion of the amount borrowed, not the entire credit limit. Although paying more reduces your balance faster, and is advisable. |
What Is A Line of Credit?
A line of credit is a revolving loan that gives you access to a set amount of money, which you can borrow upon as needed.
Unlike a personal loan, where you receive a lump sum and repay it over a fixed term, a line of credit works more like a credit card; that is, you can borrow, repay, and borrow again as long as you don’t exceed your credit limit.
Learn more: Best Line Of Credit Rates In Canada 2025
How To Use A Line Of Credit In Canada
You can use a line of credit for any expense, from minor everyday purchases to major expenses such as a home renovation or car repair. Here is a step-by-step guide on how to use a line of credit:
Step 1. Access The Funds
You can access your line of credit in multiple ways, including:
- Bank Transfer – You can transfer funds from your line of credit account to your chequing or savings account via bank transfer. This can generally be done through online banking.
- ATM: Withdraw cash from a bank machine using your debit card if your line of credit is linked to a bank account.
- Cheque: You can use your line of credit through special cheques linked to your line of credit. These can be used to pay for services or bills.
- In-Person: You can also use your line of credit by visiting your local bank branch and withdrawing money directly from your account at the teller.
- Direct Payment – You may be able to set up direct bill payments from your LOC if your lender allows it.
| Note: Be sure to only withdraw what you need and not the entire credit limit. Interest is only charged on the amount you withdraw. As such, the less money you withdraw, the more you can minimize interest costs. |
Step 2. Use Your Line Of Credit
Once you’ve withdrawn from your line of credit, you can use the funds to finance any purchase or expense you may have. There are no restrictions on what you can use the funds for.
Moreover, a line of credit is very flexible, you can use a line of credit as cash, make bill payments or purchases online.
Step 3. Repay Your Line Of Credit
Once you’ve tapped into your line of credit, you’ll need to start making payments. While you’re not required to make any principal payments, you do need to make the minimum monthly payments, which are usually the interest portion of the loan. That said, you can pay down the principal anytime.
How To Calculate Your Minimum Monthly Payments On A Line Of Credit
You minimum monthly payments on a line of credit will depend on the amount you borrow, the prime rate, and your lenders policy on minimum payments. Most lenders will charge the greater of one of the following:
- A minimum payment equal to 1% of the balancing owing
- A flat fee
- The interest charges for the billing period
You can use online line of credit calculators to help you estimate your minimum monthly payment.
How To Qualify For A Line Of Credit In Canada
To qualify for a personal line of credit, most lenders assess the following:
- Credit Score: Having a good credit score of (660+) can not only improve your odds of approval for a LOC, but it can also help you secure a lower variable rate. That said, borrowers with bad credit may still qualify for a LOC with private lenders.
- Income: Income requirements will vary by lender, however, many require you to be employed with the same lender for a minimum of 3-6 months. Moreover, you generally need to meet a minimum income requirement. For example, to be eligible for a CIBC line of credit, you need to have a minimum gross annual income of $20,000.
- Debt-to-Income Ratio: In general, having a DTI that is over 44% is considered high risk. Lenders are unlikely to approve you, and even if they do, interest rates would be high. Your current debts compared to your gross income should ideally be around 32% or lower.
| Can You Get A Line Of Credit With Bad Credit? Your options for a line of credit will likely be limited to credit unions and private lenders, where requirements are generally more flexible. |
Where Can You Get A Line Of Credit?
How To Apply For A Line Of Credit
Step 1. Compare Lenders
You can apply for a line of credit with many different lenders, including banks, credit unions, and private lenders. It’s best to compare each provider’s available rates, fees, and other costs to opening a line of credit.
Be sure to also check if you meet the lender’s minimum requirements, such as credit score, income, and residency requirements.
Step 2. Apply
Depending on the lender, you can apply for a line of credit online, by phone or in person at a branch near you. However, applying online is usually faster and more convenient.
Regardless of where you apply, you’ll need to provide certain personal information, including:
- Personal details: Name, address, date of birth, whether you rent or own and your contact information. To verify this information, the lender may ask you to provide a government photo ID.
- Employment Information: Job title, employer name, job field, years worked, company address and income. To verify this information, your lender may ask for pay stubs and bank statements.
- Credit Check Permission: Most banks will require you to authorize a hard credit check.
Step 3. Get Approval And Setup
If approved, your lender will establish the credit limit and set up your line of credit account. You can use and manage your account through online banking. You may also receive an access card, which allows you to make purchases and withdraw cash from ATMs from your line of credit.
Types Of Lines Of Credit You Can Apply For
There are two main types of lines of credit in Canada: unsecured and secured.
Unsecured Personal Lines Of Credit
An unsecured personal line of credit is a flexible loan without collateral. Borrowers pay interest only on the amount used, often at variable rates. It provides ongoing access to credit but typically comes with higher interest rates and potentially lower credit limits due to the lack of security. Approval generally requires a good credit score and a strong financial profile.
Perks Of An Unsecured Personal Line Of Credit
- No Risk To Assets: Since you’re not using collateral to back the account, there’s no risk of losing valuable assets.
Risks Of An Unsecured Personal Line Of Credit
- Higher Interest Rates: Your lender may charge a higher interest rate to offset the risk of having no asset of value to back the loan.
- Higher Credit Requirements: Again, the lack of collateral might require that you have a better credit score to reduce the lender’s risk.
Secured Personal Lines Of Credit
A secured personal line of credit is a loan backed by collateral, such as a car or house. This added security reduces the lender’s risk and therefore comes with lower interest rates and higher credit limits compared to unsecured credit lines. You can access money from your credit line as needed up to your limit and only pay interest on the amount borrowed.
Perks Of A Secured Personal Line Of Credit
- Lower Interest Rates: The collateral reduces the lender’s risk, so you may be able to get a lower interest rate on a secured line of credit compared to an unsecured credit line.
- Higher Credit Limits: Again, the reduced risk for the lender due to the collateral could make you eligible for a higher credit limit.
Risks Of A Secured Personal Line Of Credit
- Risk To Assets: If you don’t repay what you borrow, you could risk losing the asset backing your credit line.
- More In-Depth Approval Process: Applying for a secured line of credit may require more documentation and a more comprehensive assessment of the collateral used to back the loan.
What Happens If You Miss A Payment On Your Line Of Credit?
Missing a payment on a line of credit can have serious consequences, including the following:
- Higher Interest Rates – If you miss one or more payments on your line of credit, your interest rates may increase as a penalty. This, in turn, can lead to higher monthly minimum payments.
- Interest Compounds – Your unpaid balances will continue to incur interest charges, which compound. Meaning, any unpaid interest will be added to your principal balance and will also accrue interest. This can cause your debt to grow faster if you continue to miss payments.
- Credit Damage: Payments are reported to the credit bureau, so any missed payments may hurt your credit score. Moreover, with every missed payment, your credit utilization ratio will increase, which can also negatively affect your credit.
- Credit Limit Decrease – If you miss multiple payments, your lender has the right to lower your credit limit without notice.
- Account Closure And Delinquency – Your lender may also simply suspend or close your account if you miss too many payments. They may also sell your debt to a collection agency, which can further hurt your credit.
- NSF Fees – If you’ve set up automatic payments, but your bank account has insufficient funds, you’ll also be charged an NSF fee.
If you’re struggling to make the minimum payment on your line of credit, reach out to your lender immediately. They are often willing to negotiate a payment plan.
Should You Get Line Of Credit Insurance?
A line of credit insurance is like loan protection insurance. It is an optional product that can help cover your line of credit payments for a period of time in the event you become disabled or lose your job. In cases of death or critical illness, it can pay off your entire outstanding balance.
While line of credit insurance can provide peace of mind and financial protection, it does come at a cost. You will be charged a monthly fee, which can vary based on your loan amount and certain personal characteristics such as sex, age, and health.
That said, line of credit insurance can be a good option for those who:
- Are self-employed or have variable income.
- Don’t have an emergency fund or life insurance.
Note: Be sure to consider term life insurance or disability insurance. In some cases, it may provide similar benefits at a lower cost.
Does A Line of Credit Affect Your Credit Score?
Yes, a line of credit can affect your credit score both positively and negatively.
- Payment History – Payments you make to your line of credit are reported to the credit bureaus, which can positively or negatively affect your credit depending on whether your payments are late or on-time.
- Credit Utilization Ratio – With a line of credit, you credit utilization ratio will be impacted. Depending on how much you use, it can posivetly or negatively affect your credit. .
- Credit History – The longer you have your line of credit open, the more it can contribute to your credit history.
- Credit Inquiry – When you apply for a line of credit, your lender may perform a hard credit check. This can negatively affect your credit, though the impact is generally small and temporary.
What’s The Difference Between A Line of Credit vs. Credit Card?
While a line of credit and credit card are similar in many ways, there are a few key differences.
- Interest Rate – Most lines of credit have a variable interest rate. Moreover, their rates are generally lower than a credit card and they do not have a interest free grace period.
- Rewards – Lines of credit do not come with a points or cash back rewards system. Moreover, it does not have any perks like travel insurance or concerige services.
- Useage – Credit cards are used at point-of-sale in store or online. Lines of credit are usually accessed via bank transfer, cheques, or atm withdrawals.
Learn more: Compare A Line Of Credit vs. A Credit Card
What’s The Difference Between A Line of Credit vs. Personal Loan
A line of credit and personal loan both give you access to credit, however, they work very differently.
- Loan Structure – With a personal loan, you’ll receive your entire loan amount in one lump sum. Payments are fixed and each payment helps pay a portion of the interest and principal.
- Interest Rate – Personal loans have fixed rates.
- Less Flexibility – A personal loan has a lot less flexibility compared to a line of credit in terms of accessibility and repayment.
Learn more: Personal Loan vs. Line of Credit
What’s The Difference Between A Line of Credit vs. Home Equity Line Of Credit (HELOC)
- Secured – The main difference between a line of credit and a HELOC is the collateral. A HELOC is secured by the equity in your home. If you default on the loan, you lender has the right to seize your home to recoup payment.
- Interest Rate – Interest rates on a HELOC are generally lower due to the security.
- Loan Amount – You can qualify for much higher loan amounts with a HELOC, through the exact amount will dependon the equity in your home and your financial profile.
Learn more: Home Equity Line Of Credit Vs. Line Of Credit
Conclusion
A line of credit can be a useful financial safety net, especially when used responsibly. Whether you’re looking to manage short-term cash flow or finance a large project, understanding how a line of credit works—and how it impacts your credit—can help you make smarter money decisions.
Before applying, compare rates, understand the terms, and assess your ability to repay.
