Worked Examples and Checklists
Line of credit or personal loan? A Canadian worked example of the real cost
Compare a personal line of credit with a fixed instalment loan for the same $10,000 in Canada: interest-only minimums, payoff time, rate rises and when each one makes sense.
A personal line of credit and an instalment loan can carry the same interest rate and still cost very different amounts, because what you pay each month decides how long the debt lasts. In the illustrative example below, $10,000 at 9% costs about $1,448 in interest as a 3-year loan, about $2,580 on a line of credit if you pay $200 a month, and about $3,036 if you only pay a 3% minimum, which takes almost 10 years. On an interest-only minimum, the balance never falls at all. A line of credit is the better tool for uncertain or recurring costs; a loan is the better tool for a known amount you want gone.
Part of the personal loan cost worked examples. All rates illustrative.
How each product works
| Instalment loan | Personal line of credit | |
|---|---|---|
| Amount | Fixed, paid out once | Limit; draw what you need, when you need it |
| Rate | Fixed or variable | Usually variable, set as prime plus a margin |
| Payment | Fixed, includes principal | Minimum set by the lender, sometimes interest-only |
| End date | Yes | No, unless you set one |
| Re-borrowing | No | Yes, up to the limit |
| Disclosure | Total cost of borrowing shown | Rate, limit and minimum payment shown; total cost depends on use |
Both products are covered by the same disclosure rules: under the Bank Act for banks and provincial consumer protection law for other lenders. See the disclosure guide.
The example: $10,000 at 9%
You need $10,000 for a car repair and dental work. Your bank offers either a 3-year loan at 9% fixed or a line of credit at 9% variable.
| Repayment approach | Monthly payment | Months to clear | Total interest |
|---|---|---|---|
| Instalment loan, 3 years | about $318.00 | 36 | about $1,448 |
| Line of credit, $318 a month (self-imposed) | $318 | 36 | about $1,448 |
| Line of credit, $200 a month | $200 | about 63 | about $2,580 |
| Line of credit, 3% of balance minimum (at least $50) | starts at $300, falls over time | about 118 | about $3,036 |
| Line of credit, interest-only minimum | about $75 | never | $900 a year, indefinitely |
Two points stand out. If you pay the line of credit as if it were a loan, the cost is the same. The extra cost comes entirely from paying less each month. And because the minimum falls as the balance falls on a percentage-based line, it takes nearly ten years to clear.
What a rate rise does
Most lines of credit float with prime, which in practice moves with the Bank of Canada's policy rate. Illustrative: if the rate rose from 9% to 11% and you kept paying $200 a month, the payoff would stretch from about 63 to about 68 months and interest would rise from about $2,580 to about $3,438. A fixed-rate instalment loan would not change.
When a line of credit makes sense
- Costs arrive in stages or are uncertain, such as a renovation with progress payments.
- You want a standby source of money and can leave it unused.
- You have the discipline to set and keep a fixed repayment plan.
- The rate is competitive and the limit is modest relative to your income.
When an instalment loan makes sense
- You know the amount and want a guaranteed payoff date.
- You want a fixed rate you can compare across lenders (comparing offers).
- You are consolidating debt and do not want to re-borrow; see the consolidation example.
- You find it hard to stick to a self-imposed schedule.
A hybrid approach
Some borrowers use a line of credit for the flexibility, then convert the balance to a fixed instalment loan once the final amount is known. Others ask the lender to set a fixed payment by pre-authorized debit on the line. Whichever you choose, write down the payoff date and check the balance against it every few months.
Secured lines and HELOCs
A home equity line of credit usually has a lower rate than an unsecured line, but it is secured on your home and for federally regulated lenders the revolving portion is limited to 65% of the home's value under OSFI Guideline B-20. The same arithmetic applies: an interest-only HELOC balance can last for decades. See secured vs unsecured loans and lines of credit.
Checklist before opening a line of credit
- Ask how the rate is set (prime plus what margin) and how you will be told of changes.
- Ask how the minimum payment is calculated.
- Ask about annual or standby fees.
- Ask whether the lender can reduce the limit or demand repayment, and in what circumstances.
- Decide your own repayment plan and test it with the loan calculator by entering the balance and your target term.
Frequently asked questions
Does an unused line of credit affect my credit score?
An open line with a zero balance generally helps your utilization ratio. It still counts as available credit when lenders assess you, and some lenders consider the full limit when calculating debt ratios.
Can a lender cancel my line of credit?
Many line of credit agreements let the lender reduce the limit or require repayment in certain circumstances. Read the agreement's terms on changes and demand.
Is a student line of credit different?
Student lines often allow interest-only payments while you study and for a period after. The same arithmetic applies once full repayment begins.
Can I pay off a line of credit early?
Yes. You can repay any amount at any time, and you pay interest only on the balance outstanding.
Sources
- Financial Consumer Agency of Canada — lines of credit and their costs
- Office of the Superintendent of Financial Institutions — Guideline B-20 on HELOCs
- Bank of Canada — policy rate decisions that move prime
