Personal Loan vs Line of Credit: Which Is Right for You?

Life includes many large expenses. Whether you need a new car, must cover an unexpected home repair, or want to plan a vacation, borrowing can help bridge the gap. Personal loans and lines of credit are two common ways to access money for big purchases, but they work differently and suit different needs. This article explains how each option works, compares their advantages and drawbacks, and gives guidance to help you choose the right product for your situation.

Personal loans vs. lines of credit

A personal loan gives you a single lump sum that you repay in fixed installments over a defined term. This is installment credit and is often used for a specific purpose—buying a car, consolidating debt, or financing a home project, for example. Personal loans can be secured with collateral or unsecured, and the amount you can borrow depends on your credit history and overall financial profile.

A line of credit provides a maximum borrowing limit that you can draw against as needed. It’s revolving credit: when you repay amounts, you can borrow them again. Interest is charged only on the money you actually use. Lines of credit can also be secured or unsecured, and they offer greater flexibility for ongoing or unpredictable expenses.

Key differences at a glance:

Features	Personal loan	Line of credit
Type of credit	Installment (non-revolving)	Revolving
Payment schedule	Fixed payments over a set term	Flexible payments; minimum monthly payment if you borrow
Interest rates	Can be fixed or variable	Often variable and tied to the prime rate, which changes over time
Interest applicability	On the entire loan amount	Only on the portion you use
Extra fees	Possible service or transaction fees	Possible service or transaction fees
Uses	Often specified when applying	Any purpose, no need to specify

Pros and cons of a personal loan

Personal loans can be straightforward and predictable, but they aren’t the best fit for every situation.

Pros

• Interest rates can be lower than credit cards for borrowers with good credit.
• Fixed payment schedule helps you plan and ensures the debt ends on a set date.

Cons

• Interest may be higher than many lines of credit, depending on the lender.
• To access more funds you typically must refinance or apply for a new loan.
• Lenders may charge administration fees or penalties, such as for early repayment in some cases.
• Some loans are restricted to particular uses (e.g., vehicle loans or renovation loans).

Pros and cons of a line of credit

Lines of credit offer flexibility and ongoing access to funds, but they require discipline to manage.

Pros

• Interest is often lower than on personal loans and credit cards for comparable borrowers.
• You pay interest only on the amount you borrow, not the full credit limit.
• No fixed term in many cases, so you can repay on your own schedule while meeting minimum payments.
• Revolving access means you can borrow, repay, and borrow again without refinancing.
• Funds can be used for any purpose, offering maximum flexibility.

Cons

• Rates are often variable and will rise or fall with changes to the prime rate.
• Lenders may approve large limits, which can tempt you to borrow more than you need.
• No fixed repayment schedule means you must be proactive about paying down the balance.
• Secured lines of credit tied to real estate typically involve appraisal and legal fees.

How interest rates work for loans and lines of credit

The interest you pay depends on the lender, your creditworthiness, the product terms, and whether the rate is fixed or variable. Here are the key variables to consider and negotiate.

For a personal loan:

• Interest rate: Seek the lowest rate available and decide whether a fixed or variable rate suits your tolerance for change.
• Fixed vs. variable: Fixed rates remain stable for the loan term; variable rates move with broader market rates.
• Secured vs. unsecured: Securing a loan with collateral can often reduce the interest rate.
• Amortization period: The repayment period affects monthly payments and total interest. Personal loan terms commonly range from several months up to a few years.
• Fees and penalties: Confirm whether there are origination fees, service fees, or prepayment penalties.

For a line of credit:

• Interest rate: Most lines have variable rates quoted as a percentage above the prime rate (for example, prime + 1.5%). Negotiate the spread above prime where possible.
• Secured vs. unsecured: A secured line backed by property, investments, or a vehicle can often deliver a lower rate but adds risk to the pledged asset.

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

Choose a product based on how you plan to use the money and how you manage repayments.

Personal loans are often best for one-time expenses or purchases—buying a car, financing a wedding, or consolidating existing unsecured debt. Their predictable payments and defined end date can help people on a strict repayment plan.

Lines of credit are ideal when you expect to need funds intermittently over time, such as an ongoing home renovation, seasonal cash flow needs, or when you want a backup source of flexible credit. They function similarly to credit cards in terms of accessibility and flexibility but can offer lower interest rates for some borrowers.

Examples of loan types and common uses

The table below outlines common types of consumer spending and whether a personal loan or a line of credit is typically a better fit.

Type of expense	Personal loan	Line of credit
Credit card debt	X
Student or school debt	X
Vehicle purchase	X
Ongoing bills or variable expenses	X	X
Vacations or one-off experiences		X
Furniture, decor, or technology		X

Current examples of personal loan offers

Below is a snapshot of lenders and the ranges they advertise. Rates and terms vary by applicant and over time—always confirm details directly with the lender.

Lender	Loan term	APR	Loan amount	Minimum credit score
Spring Financial	6 months to 5 years	9.99% to 34.95%	$300 to $35,000	N/A
Scotiabank	1 to 5 years	6% to 10%	$5,000 to $75,000	Undisclosed
BMO	1 to 5 years	8.99% to 22.99%	$2,000 to $35,000	Undisclosed
TD Bank	1 to 7 years	8.99% to 23.99%	$5,000 to $50,000	650
CIBC	1 to 5 years	9% to 10%	$3,000 to $200,000	Undisclosed
RBC	1 to 5 years	9% to 13%	No minimum or maximum listed	Undisclosed
Mogo	6 months to 5 years	9.90% to 35.00%	$500 to $35,000	N/A
Fig Financial	2 to 5 years	8.99% to 29.49%	$2,000 to $30,000	680
MDG Financial	3 years	29.78% to 35.00%	$1,600 maximum	560
Easyfinancial	9 months to 10 years	9.90% to 35.00%	$500 to $20,000	N/A
Nyble	Up to 31 days	0%	$50 to $250	N/A

Further reading

• 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 a HELOC to invest: what to consider