Personal loan versus line of credit: Which should you choose?

Life is full of big expenses. If you ever need a new car, have a home emergency or simply want to take a vacation, might consider getting credit to pay for it. Both personal loans and lines of credit are ways to borrow money for large spends, but there are some significant differences between the two types of credit. This article provides a roadmap to deciding which is best for your needs. 

Personal loans vs. lines of credit

With a personal loan, you borrow a single (fixed) amount of money from a bank or other lender. In return, you agree to pay back the principal plus interest over a certain period of time. This is called “installment credit.” Often, personal loans are for specific expenses. For example, you might apply for a car loan to buy a vehicle, or a debt consolidation loan to reduce your debt. Personal loans can be secured with collateral or unsecured, and the amount you’re eligible to receive is tied to your credit history and financial picture.

When you’re approved for a line of credit, the bank, firm or lender extends a certain amount and you can borrow on an as-needed basis. Whatever you pay back, you can access the credit again, just like with a credit card. This is called “revolving credit.” You can use the money for any purpose you wish. Just like with loans, lines of credit can be secured or unsecured. 

Here are the key differences at-a-glance.

	Personal loan	Line of credit
Type of credit	Installment (non-revolving)	Revolving
Payment schedule	A fixed amount over a fixed time period.	As-needed, with a minimum monthly payment if you borrow
Interest rates	Fixed or variable	Usually variable, and tied to the Prime Rate (which is currently 6.45%.)
Interest applicability	On the whole loan	Only on what you borrow
Extra fees	Transaction or service fees	Transaction or service fees
Uses	A need specified when applying	Any purpose, no need to reveal

Pros and cons of a personal loan

Here are the pros and cons for personal loans.

Pros

• Interest rates can be lower than with credit cards
• The fixed payment schedule ensures your loan will be repaid by a certain date.

Cons

• Typically higher interest rates than the majority of lines of credit.
• To use more credit you have to refinance the loan or get a separate loan.
• Lenders may charge fees for administering the loan.
• There might be limitations on what you can spend the money on. A car loan is only for the purchase of a vehicle, which may seem obvious, but other loans may only be used for renovations or debt consolidation. 

Pros and cons of a line of credit 

Here are the pros and cons for lines of credit.

Pros

• Typically have lower interest rates than personal loans.
• Interest is only charged on the portion of credit used.
• There is no fixed term so you can pay it off at any time without penalty (as long as you pay the minimum monthly amount).
• The credit is “revolving”, meaning that once you pay it back you can borrow again without refinancing.
• You can use the money for any purpose.

Cons

• Interest rates are variable, based on the prime rate, so the loan rate will fluctuate. For example, you might have a line of credit where the interest rate is prime + 1.5%. As the prime rate changes, so will the total interest on your line of credit.
• Lenders often offer the maximum amount which can make it easy to overborrow. 
• As there is no fixed payment schedule, you must manage repayment on your own. 
• A secured line of credit against your home (like a HELOC) will require a one-time appraisal as well as legal fees. 

How interest rates work for loans and lines of credit

The interest you pay on a personal loan or a line of credit will depend on many factors including the lender, your credit history, the terms of the credit and the prime rate (in the case of variable interest). That said, these are the variables you can negotiate to get the best rates. 

For a personal loan:

• Interest rate
  Look for the lowest rate available to you, and decide whether you prefer a fixed or variable rate. 
• Fixed or variable rate
  Loans most often incur a fixed rate, meaning that the interest is the same throughout the term of the loan. With a variable-rate loan, the interest rate will change in the same direction as the prime rate. 
• Secured or unsecured
  You might negotiate a lower interest rate if you can secure the loan with collateral, such as a home. 
• Amortization period
  Amortization is the amount of time you take to pay off the loan and can range from six months to 60 months (five years) for personal loans, reports the Financial Consumer Agency of Canada. Adjusting your amortization period might affect your interest rate.
• Fees or penalties
  Loans come with fees. With personal loans, for example, you may pay a penalty if you pay it off early.

For lines of credit:

• Interest rate
  Most lines of credit have a variable interest rate. In this case, the number you have to pay attention to is the percentage above the prime rate. A rate of prime + 1.5% means you’ll pay 1.5% more than the prime rate. Try to negotiate as low of a rate as you can. 
• Secured or unsecured
  You may be able to negotiate for a lower interest rate if you secure your line of credit with collateral, such as a real estate property, vehicle or investments. 

When to use a personal loan? When to use a line of credit?

Personal loans and lines of credit are both powerful financial tools, but how do you know when you should choose one over the other? 

In general, a personal loan is better for one-time expenses like a vacation or the purchase of a car. They’re also more structured so may appeal if you need help managing your finances.

A line of credit can be used like a credit card, with similar positives and negatives, like flexibility, accessibility and more. It’s great if you foresee needing credit over time. For example, a line of credit would be far more useful for, say, a longer renovation project where you can withdraw and repay continually without having to refinance. But you could use it for anything really.

What are the best loan rates in Canada right now?

Here’s a breakdown of the best personal loans available in Canada right now.

Lender	Loan term	APR	Loan amount	Minimum credit score
Spring Financial	6 to 60 months (5 years)	0.8% to 46.99%	$500 to $35,000	N/A
Scotiabank	Up to 5 years	6% to 10%	N/A	Undisclosed
BMO	1 to 5 years	8.99% to 22.99%	$2,000 to $35,000	Undisclosed
TD Bank	1 year minimum to 7 year maximum	8.99% to 23.99%	$2,000 to $50,000	650
CIBC	1 to 5 years	9% to 10%	$3,000 to $200,00 (unsecured loan)	Undisclosed
RBC	1 to 5 years	9% to 13%	N/A	Undisclosed
Mogo	6 to 60 months (5 years)	9.90% to 46.96%	$500 to $35,000	N/A
Fig Financial	24 to 60 months (5 years)	12.99% to 31.99%	$2,000 to $30,000	N/A
MDG Financial	36 months (3 years)	29.78% to 44.80%	Up to $1,600	Minimum of 560
Easyfinancial	9 to 84 months (7 years)	29.99%	$500 to $20,000	N/A

When to use a personal loan vs. a line of credit?

Here’s a quick guide to help you decide. It lists the most common types of debt Canadians carry, according to the most recent data from Statistics Canada, as well as the most popular large purchases Canadians plan for 2024, according to an Affirm poll. But, as with every financial decision you make, you need to use what you read as a starting point and figure out what makes the most sense for you and your personal situation. 

Type of debt	Personal loan	Line of credit
Credit card debt	X
School debt	X
Vehicles	X
Other bills	X	X
Vacations		X
Furniture and decor		X
Technology		X
Concert tickets or other experiences		X

So, which will you choose, a line of credit or loan?

Read more about loans:

• How to buy a car in Canada and get the best loan rate
• Is your car worth less than what you’re paying for it?
• Find the best mortgage rates in Canada
• Borrowing from your HELOC to invest in equities

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