Lines of credit and personal loans

From Financial Consumer Agency of Canada

Lines of credit

A line of credit is a type of loan that lets you borrow money up to a pre-set limit. You don't have to use the funds for a specific purpose. You can use as little or as much of the funds as you like, up to a specified maximum.

You can pay back the money you owe at any time. You only have to pay interest on the money you borrow.

To use some lines of credit, you may have to pay fees. For example, you may have to pay a registration or an administration fee. Ask your financial institution about any fees associated with a line of credit.

Interest on a line of credit

Usually, the interest rate on a line of credit is variable. This means it may go up or down over time.

You pay interest on the money you borrow from the day you withdraw money until you pay the balance back in full.

Your credit score may affect the interest you'll pay on a line of credit. It tells lenders how risky it is to lend you money. Usually, the higher your credit score, the lower the interest rate on your line of credit will be.

Getting money from a line of credit

To access money from a line of credit, you may:

  • write a cheque drawn on your line of credit
  • use an automated teller machine (ATM)
  • use telephone or online banking to pay a bill
  • use telephone or online banking to transfer money to your chequing account

Paying back a line of credit 

You'll get a statement showing the amount owing on your line of credit each month. You must make a minimum payment each month. Usually, this payment is equal to the monthly interest. However, paying only the interest means that you'll never pay off the debt that you owe.

Pros and cons of a line of credit

Before taking out a line of credit, compare the pros and cons. 

Pros of a line of credit

  • You will usually pay a lower interest rate for a line of credit than for a credit card or a personal loan
  • Depending on the product and financial institution, you may not be charged set-up fees or annual administration fees
  • To avoid unnecessary fees, if you bank with the same financial institution where you got a your line of credit, you may be able to have any overdraft on your chequing account transferred to your line of credit

Cons of a line of credit

  • With easy access to money from a line of credit, you may get into serious financial trouble if you don't control your spending
  • If interest rates increase, you may have difficulty paying back your line of credit

Choose the right line of credit for you

You can apply for a secured or unsecured line of credit.

Secured line of credit

With a secured line of credit, you use an asset as collateral for the line of credit. For example, the asset could be your car or your home. If you don't pay back what you owe, the lender can take possession of that asset. The advantage is that you can get a lower interest rate than with an unsecured line of credit.

Home equity line of credit (HELOC)

A home equity line of credit is a type of secured credit where your house acts as collateral. It usually has a higher credit limit and lower interest rate than other loans and lines of credit.

Unsecured lines of credit

With an unsecured line of credit, the loan isn't secured by any of your assets. Some types include personal lines of credit and student lines of credit.

Personal line of credit

A personal line of credit may be used for unexpected expenses or consolidating higher interest rate loans. Interest rates are usually lower than for credit cards and personal loans.

Student line of credit

A student line of credit is specifically for paying for post-secondary education.

Student lines of credit can be used to help pay for basic expenses, such as tuition, books, and housing.

Personal loans

Personal loans let you borrow a fixed amount of money. You must pay back the loan, plus interest, over a fixed period of time.

Every personal loan has its own terms and conditions. These may include the:

  • amount of the loan
  • interest rate and whether it is fixed or variable
  • payment terms
  • other fees and service charges
Before you sign a personal loan agreement, make sure you understand the terms and conditions.

How a lender determines your credit limit and interest rate

When you apply for a line of credit or a loan, a financial institution will ask for a lot of personal information. This is to confirm your identity.

The lender will also take a close look at your finances to make sure you can repay your debt. They will consider:

  • your income
  • your current level of debt with other financial institutions
  • your credit report, which is your record of paying your bills on time or paying back money you borrow
Financial institutions usually require a minimum household income of $35,000 to $50,000 to approve a line of credit.

What you need to know before you borrow

When you get a loan or line of credit with a federally regulated financial institution, you have the right to receive certain information.

See a sample credit agreement.

You may make a complaint if your financial institution doesn't give you all the required information.

Find out how to make a complaint.

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