A Personal Loan vs. A Line of Credit

A Personal Loan vs. A Line of Credit

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated September 30, 2022

A loan can come in handy when you need to cover a pressing expense or an unexpected bill, especially when there’s not enough money in your savings to make such payments. Luckily, there are plenty of options for you to tap into in order to get your hands on the cash you need to cover such expenses, including a personal loan or a line of credit. 

But how do you know which one you should choose? More specifically, what’s the difference between a personal loan and a line of credit?

What Is A Personal Loan? 

A personal loan involves borrowing a certain amount of money from a bank or alternative lender. In return for borrowing the funds, the borrower agrees to repay the loan in installments. Each payment includes both the principal amount as well as the interest portion. The amount of money that goes towards interest will depend on the interest rate and the loan term.

Personal loans are typically unsecured, which means there is no collateral used to back up the loan. Unsecured loans tend to be riskier for lenders, and as such, they usually come with higher interest rates compared to secured loans. 

How Much Can You Borrow? 

The amount of money that you are able to borrow will depend largely on your credit score, payment history, income, and debt load. In general, lenders offer personal loans between $500 to $35,000, however, some lenders may offer higher amounts. 

What Interest Rate Will You Be Charged?

The interest rate you are charged will also depend on your financial and credit profile. The lower your credit score and the higher your debt-to-income ratio, the higher you can expect your interest rate to be. It’s best to check your credit score by pulling your credit report before applying for a personal loan in order to get a better idea of how easy or difficult it may be to get approved for a personal loan, as well as what type of interest rate you can expect.

Can You Use A Personal Loan To Pay Off Your Credit Card Debt?

There are several different uses for personal loans and a popular one among Canadians is to pay off high-interest credit card debt. According to TransUnion, credit card debt averages around $4,179 and accounts for around 5.3% of total outstanding debt. And when you factor in the sky-high interest rates that credit card issuers typically charge – anywhere between 19.99% to 29.99% or more – these rates can make it extremely difficult to pay it all off.

Many borrowers will take out a personal loan in order to pay off their credit card debt at a much lower interest rate, which can not only save them plenty of money over time but make monthly payments more affordable.

Can You Use A Personal Loan As A Debt Consolidation Solution?

Debt consolidation involves taking out a new, larger loan to pay off several smaller loans, usually at a much lower interest rate. Rather than paying a number of debts at varying times of the month and at different interest rates, borrowers can use the money from a personal loan to replace all that, making it much easier to manage. That said, it only makes sense to take out a personal loan to consolidate debt if the interest rate is much lower than all current loans.

What Is A Line Of Credit? 

A line of credit involves borrowing a certain amount of money from a creditor. Unlike a personal loan, the funds with a line of credit do not have to be withdrawn in one lump sum. Borrowers can take out as much or as little money as needed up to the specified credit limit. Only the money withdrawn is charged interest rather than the entire credit limit. Once that money is repaid, no further interest will be charged until the next withdrawal.

How Do Personal Line Of Credit Repayments Work? 

A personal line of credit differs from a traditional loan in many ways, including how you repay what you borrow. 

With a personal loan, you would be required to make regular payments on pre-scheduled dates until the full loan is paid back by its due date. But with a personal line of credit, the repayments are more flexible.

The following are the more common types of repayments on a personal line of credit:

Draw And Repayment Periods

When you apply for a line of credit, you’ll be given a specific period within which you can withdraw money, which is referred to as the “draw period.” During this time, you’re only obligated to pay the interest portion of your payments. If you carry an outstanding balance by the time the draw period ends, you’ll enter a repayment period.

During this period, you cannot make any more withdrawals and you’ll have to make monthly installments to repay any remaining balance. The specific terms of repayment may vary by lender. 

Balloon Payments

With this type of repayment arrangement, the full balance must be repaid at the end of the draw period.

Demand Line Of Credit

A less common way to repay a line of credit is through a demand line of credit. With this repayment plan, the lender has the right to require full repayment at any time.

Benefits Of Using A Line Of Credit Over A Personal Loan

While personal loans are quite popular, a line of credit can be beneficial for a number of reasons. 

  • Help Cash Flow – A line of credit can come in handy if you own a business and are short on cash flow one particular month. Whether you need the cash to cover employee paycheques, pay off vendors and suppliers, or buy new inventory, having access to a line of credit can really come in handy. 
  • Immediate Access To Cash – Rather than taking out a small personal loan every time you need some cash, you can have a line of credit on the back burner ready to be 
  • Versatile – Lines of credit are perfect for those who require some flexibility, as they can be accessed at any time and interest is only charged on the amount withdrawn.

Drawbacks Of Using A Line Of Credit Over A Personal Loan

While there are plenty of perks associated with lines of credit, they may not be appropriate for certain situations. 

  • Rack Up Debt – Like a credit card, you can rack up too much debt by constantly borrowing from this account, only to be left scrambling to come up with enough money to make your payments.
  • Variable InterestA line of credit tends to come with variable interest rates, so you could find yourself paying less one month but more the next since the interest rate fluctuates depending on the bank’s prime rate.
  • Can Affect Credit – The amount of money you withdraw will count towards your overall credit utilization, which is a factor that is considered when calculating your credit score. The higher your credit utilization, the more it can negatively affect your credit. 

Where Can You Get A Personal Line Of Credit And Personal Loan? 

You can apply for a personal line of credit or a personal loan from a variety of sources, including banks, credit unions, and alternative online lenders. 

Banks. The lending criteria for a personal line of credit and personal loan at a bank may be more stringent compared to other lenders. Generally speaking, you’ll need good credit and sufficient income to get approved by a bank for a personal line of credit or personal loan. 

Credit unions. You may be able to secure a lower interest rate on your line of credit or personal loan with a credit union compared to a bank, but you will need to apply to become a member before applying for the loan.

Alternative online lenders. If you don’t meet the criteria for loans with a bank or credit union, you may have better luck with an alternative lender. These lenders offer financial products like personal lines of credit and personal loans to all sorts of borrowers, including those with bad credit. However, you will likely be charged a higher interest rate.

Personal Loan vs. Personal Line Of Credit Overview

There are several differences between personal loans and personal lines of credit, as outlined in the following chart:

Personal LoanLine of Credit
Disbursement MethodLump sum paymentReusable; any portion can be accessed at any time
Secured or UnsecuredMay be either secured or unsecuredMay be either secured or unsecured
Interest RateFixed or variableVariable
Loan AmountVaries by lender (average amounts vary between $500 – $35,000)Minimum $3,000 -$5,000
RepaymentInstallment payment schedule: 
Weekly
Bi-weekly
Semi-monthly
Monthly payments
Pay interest only on the amount you use during the draw period.

Interest and principal must be repaid by end of the repayment term.

How To Apply For A Line Of Credit

The exact way to apply for a personal line of credit depends on the lender you ultimately work with. The following chart describes how to apply with each of the 5 Big Banks in Canada:

Line Of Credit TDApply online  
Book an appointment in person at a branch 
Call TD at 1-866-222-3456
Line Of Credit ScotiabankApply online
Book an appointment in person at a CIBC branch 
Call Scotiabank at 1-888-882-8958
Line Of Credit BMOBook an appointment to speak with a specialist at a BMO branch 
Line Of Credit RBCBook an appointment in person at a branch 
Call RBC at 1-800-769-2511
Line Of Credit CIBCApply online
Book an appointment in person at a CIBC branch 
Call CIBC at 1-866-525-8622

Should You Use A Personal Loan Or Line Of Credit? 

Both a personal loan and line of credit can provide you with access to the money needed to cover a variety of expenses. But which one is best for you?

Personal Loan 

A personal loan makes sense if you know exactly how much you need to cover a specific expense. 

For instance, if you need to borrow $15,000 for a home renovation, then consider opting for a $15,000 personal loan. But if you’re not sure exactly how much you’ll need, a personal line of credit might make more sense.

Line of Credit

A personal line of credit is handy to have when a financial need arises at any time, so it’s always available, even on short notice. There’s no need to re-apply for a loan every time an expense pops up. 

You may find a line of credit more suitable for you if you like the flexibility of being able to withdraw funds of varying amounts.

A Personal Loan vs. A Line Of Credit FAQs

What’s easier to get, a personal loan or line of credit?

Qualifying for a personal line of credit may be more difficult if you don’t have good credit. In this case, a personal loan with an alternative lender may be easier to get approved for if you have bad credit, but you’ll be charged a higher interest rate.

What’s the difference between a personal loan and a line of credit?

With a personal loan, your lender will give you a lump sum of money upfront, which you’ll repay — plus interest and fees — in regular installments. A personal line of credit, on the other hand, is a type of revolving credit that lets you use as much money as needed at any time — up to your credit limit. It is repaid in minimum monthly payments to cover the interest and then after a specific number of years, usually ten, you’ll be required to start paying off the balance. 

How do line of credit payments work?

Instead of making regular installment payments according to a set payment schedule, you repay what you owe from your line of credit at any time. That said, you may have a time limit within which your line of credit must be fully repaid. Plus, you’ll need to make monthly interest payments on the amount you borrow, since interest starts accruing the moment the line of credit begins.

What happens if I don’t touch my line of credit?

If you don’t end up using your available credit, you won’t be charged any interest, since interest is only charged on amounts withdrawn. Plus, your credit utilization ratio — which represents how much of the available credit you use at any given time — will remain low, which can have a positive impact on your credit scores.  

Final Thoughts

A personal loan and a line of credit are great tools to take advantage of to gain access to much-needed cash. But the decision you make between one or the other will depend on your specific circumstances, namely your finances and what you need the money for. 


Rating of 4/5 based on 2 votes.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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