Personal Loan vs. Line of Credit: How to Choose

The difference between a line of credit and a loan is that a loan is borrowed as a lump sum, while a line of credit can be used and repaid on an ongoing basis.

Young woman sitting on the sofa, checking her finances on the phone app., comparing the total cost for a personal loan vs. a line of credit.

The primary difference between a personal loan and a line of credit is that a loan is a lump sum of money that must be repaid on a set schedule, whereas a line of credit can be used for borrowing on an ongoing basis.

Personal loans and lines of credit can be useful tools for covering big expenses like a new car or home renovations. Knowing the differences, similarities, and how each works can help you decide which is a better choice for your borrowing needs.

Personal loan vs. line of credit: Key differences

	Line of credit	Personal Loan
Credit type	Revolving.	Non-revolving.
Interest rate type	Typically variable.	Fixed or variable.
Interest rate charged on	Withdrawn funds only.	The entire loan amount.
Payment schedule	None, but borrowers must make minimum monthly payments to keep their line of credit in good standing.	Pre-determined.
Typical uses	Major purchases, emergencies, debt consolidation, ongoing purchases.	Major purchases, emergencies, debt consolidation.

While personal loans and lines of credit are both borrowing methods, these differ in terms of how and when you access the funds, accrue interest, typical uses and more.

Interest rate

Personal loans and lines of credit are subject to interest — which varies in both cases. The interest on a line of credit accrues on the funds you withdraw, not on the full available amount in your account. You can pay back what you owe at any time to stop interest accruing or make a minimum payment each month, which usually covers your interest owed.

With a personal loan, you’ll pay interest on the entire lump-sum amount. You’ll make set payments on a predetermined schedule over the course of your loan term. These payments will go toward both interest and your loan principal.

Personal loan interest rates can be either variable — subject to change — or fixed — stay the same over the loan’s term. Although, lines of credit tend to have variable rates based on the lender’s prime rate.

Typical uses

A personal loan is typically used for a specific purpose, whereas a line of credit is often a way to access funds even if you don’t know how you want to spend them yet. A line of credit can be a good backup for emergencies or unexpected expenses if you’re still working on building up your emergency fund.

There are no rules about what you can purchase with a line of credit versus a personal loan. Lines of credit can be ideal for ongoing, smaller needs because you only pay interest on the funds you use. Personal loans may be a better fit for major one-time expenses, like buying a car or doing a major home renovation.

Revolving vs. non-revolving credit

A line of credit is revolving credit because you have open-ended access to the funds — you can keep withdrawing and repaying borrowed money when you need, provided your account is in good standing.

A personal loan is non-revolving credit because once you pay it back, you lose access to that credit. If you want to access it again, you’ll have to apply for another loan.

Personal loans and lines of credit: Similarities

Although personal loans and lines of credit work differently, they do have a number of features in common.

Qualification criteria

Most financial institutions have a minimum set of criteria that you must pass to qualify to apply for a loan or line of credit, including:

Canadian residency. You may need to prove that you’re a resident of Canada.
Minimum age requirement. You will likely need to be the age of majority in your territory or province.
Income or employment. Lenders may require that you show proof of income such as a pay stub to apply. For lines of credit, lenders might want to see a minimum household income of $35,000 to $50,000. Personal loan lenders, especially alternate lenders, can be more flexible about income requirements, though you’ll likely still have to verify your income.

Credit check

With some exceptions, lenders of both personal loans and lines of credit will want to do a credit check to gain insight into your credit history and score. This gives them an idea of your creditworthiness.

Scores of 660 and above are generally perceived as good. The higher your credit score, the better chance you have of being approved and getting the best rates.

Improving your credit score can vastly improve your odds of getting approved for any type of loan or line of credit.

Issuers

Most traditional financial institutions, including banks and credit unions, offer both lines of credit and personal loans in Canada.

Some alternative and private lenders who are not associated with, nor as tightly regulated as major banks, also offer personal loans. Their interest rates and fees may be higher than traditional banks and credit unions.

Interest

Lenders offer loans because they earn a profit by charging you interest for the privilege of accessing their money. Whether you take out a personal loan or a line of credit, you’ll pay interest on the money you borrow.

A quick guide to personal loans and lines of credit

What is a personal loan?

A personal loan, sometimes called an installment loan, involves borrowing a fixed amount of cash from a financial institution or private lender that you agree to repay with interest over a set period.

Types of personal loans

Debt consolidation loan

A debt consolidation loan comes with a reasonable interest rate that you can use specifically to pay off higher-interest debts, such as credit card balances. The idea is that it’s easier to repay a single loan and save money through a lower rate of interest.

Unsecured loan

In contrast to a secured loan, an unsecured loan doesn’t require collateral against non-payment, like a house or car.

An unsecured personal loan is sometimes called a signature loan because your signature secures the loan rather than any of your assets.

Pros and cons of a personal loan

Pros

Allows you to afford major purchases.
Many private loans don’t require collateral.
The fixed payment schedule can help with budgeting.

Cons

May charge high interest rates.
Some lenders may charge additional fees.
A missed payment will negatively affect your credit.

What is a line of credit?

A line of credit, also called a personal line of credit, is a form of revolving credit that’s generally available from banks and credit unions.

A line of credit gives you ongoing access to a set amount of money to use as needed. You’re only charged interest on the amount you withdraw from the account. As long as you pay the required minimum monthly payments, your line of credit will remain available and in good standing.

Types of lines of credit

Personal line of credit. A personal line of credit is an unsecured line of credit that doesn’t require collateral. As with personal loans, unsecured lines of credit typically have a higher rate of interest than secured ones.
Home Equity Line of Credit (HELOC). A home equity line of credit uses your home as collateral against nonpayment of any balance owing. HELOCs tend to have lower rates than personal lines of credit.
Business line of credit. Business owners can apply for a line of credit that gives them ongoing access to funds to help run and expand their enterprise.
Demand line of credit. Businesses can also use this type of credit secured by their assets, like inventory or accounts receivable. Note: the financial institution can demand full repayment of the funds at any time.
Securities-Backed Line of Credit (SBLOC). With this type of secured line of credit, you use the value of your investments held in a brokerage account as collateral against non-payment.

Pros and cons of a line of credit

Pros

Access money whenever you need it.
Only pay interest on the amount you borrow.
Interest rates may be lower than those associated with personal loans.

Cons

Your interest rate could increase.
Easy access to borrowed funds can result in overspending.
Making minimum payments on large balances can result in paying more in interest.

A line of credit may offer more flexibility than a personal loan when it comes to access and repayment. However, it can be easier to overspend with a line of credit.

The interest you’ll pay on a personal loan or line of credit will depend on your lender, finances and your credit score. Personal loan interest rates vary quite a bit; some may be lower than line of credit rates, some may be much higher.

About the Authors

Clay Jarvis

Clay Jarvis is NerdWallet’s mortgage and real estate expert in Canada. Thus far, his entire professional writing career has revolved around real estate. Prior to joining NerdWallet, he was the…

Sandra MacGregor

Sandra MacGregor is a freelance writer who has been covering personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like…

DIVE EVEN DEEPER

Hannah Logan

5-Year Fixed Mortgage Rates

Compare customized 5-year fixed mortgage rates from Canada’s best lenders and brokers for free. Find the lowest mortgage rate and apply for the home loan that best fits your needs.

Personal Loan vs. Line of Credit: How to Choose

Written By

Edited By