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

When it comes to borrowing money, two popular options often come to mind: lines of credit and personal loans.

At Financial Canadian, we understand that choosing between a line of credit versus personal loan can be challenging.

Both options have their unique features and benefits, making them suitable for different financial situations and needs.

What Is a Line of Credit?

A line of credit offers a flexible borrowing option that allows access to funds up to a predetermined limit. Unlike a personal loan, you don’t receive a lump sum upfront. Instead, you can draw money as needed and only pay interest on the amount you use.

How Lines of Credit Work

When approved for a line of credit, the lender sets a credit limit based on factors like income, credit score, and existing debts. You can borrow any amount up to this limit, repay it, and borrow again. This revolving nature makes lines of credit ideal for ongoing expenses or when the exact amount needed is uncertain.

Secured vs Unsecured Lines of Credit

Lines of credit come in two main types: secured and unsecured. A secured line of credit is guaranteed by collateral, such as a home. An unsecured line of credit is not guaranteed by any asset; one example is a credit card.

Interest Rates and Fees

Interest rates for lines of credit are typically variable, meaning they can fluctuate based on market conditions.

Be aware of potential fees associated with lines of credit. These may include annual fees, transaction fees, or inactivity fees.

Flexible Borrowing and Repayment

One of the biggest advantages of a line of credit is its flexibility. You can borrow up to $50,000 with good and bad credit. Repayment terms are also more flexible than personal loans. Most lines of credit require minimum monthly payments, often just the interest owed. However, it’s strongly recommended to pay more than the minimum to reduce your principal and save on interest over time.

The flexibility of a line of credit can be beneficial, but it also requires discipline. Without a fixed repayment schedule, it’s easy to fall into a cycle of debt if you’re not careful with your borrowing and repayment habits.

Now that we’ve explored the ins and outs of lines of credit, let’s turn our attention to personal loans and how they differ from this flexible borrowing option.

What Are Personal Loans?

Definition and Basic Concept

Personal loans allow you to borrow money and repay it over time. They’re typically unsecured, which means no collateral, and can be used for almost any purpose. These loans offer a structured borrowing experience with clear repayment schedules, making them distinct from lines of credit. Personal loans suit large, one-time expenses such as debt consolidation, home renovations, or major purchases.

How Personal Loans Function

When you take out a personal loan, you receive the entire loan amount upfront. You then repay the loan in fixed monthly installments over a set period, typically ranging from one to seven years. This structure allows for precise financial planning and budgeting.

Types of Personal Loans

Personal loans come in two main types: secured and unsecured. Secured loans require collateral (such as a car or savings account), which the lender can claim if you default on the loan. These loans often offer lower interest rates due to the reduced risk for lenders. Unsecured loans don’t require collateral but typically have higher interest rates to compensate for the increased risk to the lender.

Interest Rates and Repayment Terms

One of the key advantages of personal loans is their fixed interest rates. Your interest rate remains the same throughout the loan term, which simplifies budgeting as your monthly payments stay consistent. According to Bankrate Monitor data, as of June 11, 2025, the average personal loan rate is 12.65 percent for customers with a 700 FICO score (though rates can vary based on factors like credit score and loan amount).

Repayment terms for personal loans are also fixed, typically ranging from 12 to 84 months. Shorter terms often come with lower interest rates but higher monthly payments, while longer terms offer lower monthly payments but result in paying more interest over time.

Lump Sum Borrowing and Structured Repayment

Unlike lines of credit, personal loans provide the entire loan amount at once. This can benefit borrowers who know exactly how much they need to borrow. The structured repayment schedule of personal loans can also help borrowers who prefer a clear path to becoming debt-free.

However, it’s important to note that once you’ve received the loan funds, you can’t borrow more without applying for a new loan. This lack of flexibility marks a key difference between personal loans and lines of credit.

As we move forward, let’s compare personal loans and lines of credit to help you determine which option might better suit your financial needs.

How Lines of Credit and Personal Loans Compare

Interest Rates and Costs

Interest rates for lines of credit are typically variable, while personal loans offer fixed rates. As of June 2025, the average personal loan rate in Canada is around 7.51%, according to Statistics Canada. Lines of credit often have rates starting from prime plus 1%, which can fluctuate based on market conditions.

Personal loans may come with origination fees (usually ranging from 1% to 5% of the loan amount). Lines of credit often have annual fees (which can be around $50 to $200, depending on the lender). It’s important to factor in these costs when comparing your options.

Borrowing Limits and Accessibility

Personal loans generally offer higher borrowing limits compared to unsecured lines of credit. With good credit, you might qualify for a personal loan of up to $50,000 or more. Unsecured lines of credit typically max out at around $25,000 for most borrowers.

However, lines of credit provide more flexibility in accessing funds. You can draw money as needed, up to your credit limit, without reapplying. With a personal loan, you receive a lump sum upfront and would need to apply for a new loan if you require additional funds.

Repayment Structure

Personal loans have a fixed repayment schedule with set monthly payments over a predetermined term. This structure can benefit budgeting and ensures you’ll be debt-free by the end of the term if you make all payments on time.

Lines of credit offer more flexibility in repayment. You typically only need to make minimum payments, often just the interest owed. While this flexibility can be advantageous, it also requires more discipline to avoid carrying debt for extended periods.

A study by the Financial Consumer Agency of Canada found that borrowers with lines of credit were more likely to carry debt for longer periods compared to those with personal loans. This highlights the importance of having a solid repayment plan when opting for a line of credit.

Impact on Credit Score

Both lines of credit and personal loans can affect your credit score, but in slightly different ways. Personal loans are installment credit, which can positively impact your credit mix. Lines of credit are revolving credit, similar to credit cards.

With a line of credit, your credit utilization ratio (the amount of credit you’re using compared to your limit) plays a significant role in your credit score. Try to keep your utilization below 30% for maintaining a good credit score.

Personal loans don’t affect your credit utilization ratio but can temporarily lower your credit score when you first take out the loan due to the hard inquiry and new account. However, making consistent, on-time payments can boost your score over time.

Best Uses for Each Option

Personal loans are ideal for large, one-time expenses where you know the exact amount needed. They excel for debt consolidation, major home renovations, or financing a significant purchase like a car or wedding.

Lines of credit shine in situations where you need ongoing access to funds or aren’t sure of the exact amount you’ll need. They’re great for emergency funds, irregular expenses, or projects with fluctuating costs like home improvements or starting a small business.

The best choice depends on your specific financial situation and needs. Always compare offers from multiple lenders to ensure you’re getting the best deal.

Final Thoughts

Your choice between a line of credit versus personal loan depends on your financial situation and borrowing needs. Personal loans offer structure with fixed rates and terms, ideal for one-time, large expenses. Lines of credit provide flexibility in borrowing and repayment, suitable for ongoing or unpredictable expenses.

Consider your financial goals, borrowing purpose, credit score, and ability to manage revolving credit responsibly when deciding. Personal loans might suit you if you value predictable monthly payments, while lines of credit could benefit those needing ongoing fund access. Assess your income stability, existing debts, and long-term financial plans before making a decision.

At Financial Canadian, we help you navigate your borrowing options and find the best solution for your needs. Our comprehensive web design service can establish your strong online presence, reaching more potential customers. We support your financial journey, whether you’re looking to borrow or boost your digital footprint.