Personal loan vs line of credit

A personal loan and a line of credit can both provide the money you need to pay for big purchases. But the way you access the money, and how and when you repay it, is different for each option. Keep reading for a side-by-side personal loan vs. line of credit comparison to help you decide which is right for you.

Quick summary: personal loan vs. line of credit

	Personal loan	Line of credit
How you get the money	Lump sum upfront	Withdraw funds when needed (up to your credit limit)
Loan term	Typically 1–⁠7 years	Ongoing
Interest rate	Can be fixed or variable	Usually variable
Repayments	Regular monthly payment	Monthly payment varies depending on the amount you withdraw
Pros	Fixed repayment schedule Competitive rates if you have strong credit Use funds for any legitimate purpose	Lower interest rate than a credit card (if you have good credit) Flexible access to funds Only pay interest on the money you use
Cons	High rates for bad credit You pay interest on the entire loan amount Loan origination fee might apply	Risk of overspending Interest rates could rise and increase your repayment amount Traditional lenders have strict eligibility criteria
Good for	Large purchases when you know exactly how much money you require	Ongoing expenses when you’re not sure of the total amount you need
	Best personal loans	Lines of credit

• Compare personal loans
• Compare lines of credit

Personal loan vs. line of credit: What’s the difference?

There are several key differences between a personal loan and a line of credit, so let’s break down each one.

1. How you access funds. A personal loan provides you upfront with a lump sum of money as soon as you sign the loan contract. With a line of credit, you’re able to withdraw up to your approved limit on an ongoing basis, as long as you’re making minimum monthly repayments. This means you can take what you need when you need it.
2. Loan term. A personal loan has a fixed term length, usually between one and seven years. You pay your loan back in full by the end of the term, and the loan closes. A line of credit doesn’t come with a set repayment period. Borrowed money become available again after it’s repaid. Revolving credit works a lot like a credit card and can be used for ongoing expenses.
3. Repayments and interest. Both a personal loan and a line of credit involve monthly repayments. However, with a personal loan, you pay interest on the entire loan amount, while a line of credit only requires you to pay interest on the funds you use (not the full credit limit).

Why choose a personal loan instead of a line of credit?

• Fixed repayment schedule. If you choose a fixed-rate personal loan, you have the security of knowing exactly how much your monthly payment will be. This can make it easier to budget for loan repayments.
• Early repayment allowed. Many lenders will allow you to pay off your loan early without penalty—check the fine print to make sure a prepayment penalty doesn’t apply.
• Use the money how you want. Personal loan funds can be used for any legitimate purpose, including debt consolidation, a vacation or a large purchase.
• Secured or unsecured. Unsecured personal loans are available, but you also have the option of providing an asset as collateral to help you access a lower rate and a higher loan amount.

What to watch out for

• Eligibility requirements. Traditional lenders like banks and credit unions have strict eligibility criteria, so you may struggle to get a loan if you have bad credit.
• High rates for bad credit. Online and alternative lenders are willing to provide loans to people with bad credit, but the interest rates are usually high.
• You can’t increase your loan amount. Your personal loan amount is fixed, so you can’t increase the size of your loan if your costs blow out unexpectedly.
• Interest charges. You pay interest on the entire amount you borrow.
• Origination fees. Check whether the lender charges an origination fee or any other fees.

Why choose a line of credit instead of a personal loan?

• Flexibility. You can withdraw funds from your line of credit whenever you want, as long as you don’t exceed your credit limit. Once you repay what you use, those funds become available for you to use again if needed.
• Easy access to funds. It’s easy to access your line of credit funds via online and mobile banking and, in some cases, via ATM withdrawals and cheques.
• Only pay interest on what you use. You’re only charged interest on the money you actually withdraw, not on your full credit limit.
• Lower interest rate than a credit card. If you’ve got good credit, the interest rate on a line of credit is lower than with a credit card.
• No fixed repayments. As long as you’re making a minimum required monthly payment (a percentage of withdrawn funds), there’s no fixed repayment amount. This can be handy if you’re experiencing short-term cash flow problems.

What to watch out for

• Variable interest rates. If interest rates rise, the cost of your repayments will increase.
• Eligibility requirements. Traditional lenders like banks and credit unions have strict eligibility requirements, so you may struggle to get a line of credit if you don’t have good or excellent credit.
• High rates for bad credit. While some lenders work with bad-credit borrowers, you’ll need to watch out for high interest rates. Learn more about lines of credit for bad credit.
• Watch out for fees. Check the fine print to find out if your line of credit comes with annual or monthly fees or if there’s a fee when you withdraw funds.

Is it better to get a personal loan or a line of credit?

It depends on why you need to borrow money.

A personal loan is a good choice if you want to consolidate debt or pay for a large purchase. It’s best suited for one-time expenses and purchases, and it provides the security of a regular payment schedule to make it easier to budget for your loan repayments.

A line of credit might be a better option if you need an ongoing source of funding to be used when needed. Since a line of credit is revolving, you won’t be charged on funds you don’t withdraw, making it an excellent option for backup or emergency sources of funding. The flexibility of a line of credit also means that it’s well suited to situations where you’re unsure of exactly how much money you will need—like if you’re paying for home renovations or a wedding.

But having a line of credit available could tempt you to spend more than you need or more than you can comfortably afford to repay, so you’ll need to be disciplined. Be careful when deciding how often you draw from your line of credit and how much money you borrow.

Bottom line

Both personal loans and lines of credit can be useful when you need access to extra funds. The right option for you depends on your personal financial situation and borrowing needs, so compare personal loans vs. lines of credit to decide which is the best fit.

Frequently asked questions

• Should I choose a personal loan or a line of credit?

  It depends on your borrowing needs. If you're looking to use funds for one large expense, then you might be better off with a personal loan. If you want an ongoing source of funding that you can access when needed, a line of credit might be more suitable.

• How much can I borrow with a personal loan vs. line of credit?

  Most lenders offer personal loans and lines of credit of up to $50,000 (approximately). However, larger amounts may be available from some lenders, and you may also be able to access a larger loan amount or a higher credit limit by providing an asset as collateral.

• How do I access money from a line of credit?

  The access options available to you depends on the lender. However, you will typically be able to access funds via online and mobile banking, withdrawing cash at an ATM, writing a cheque or by visiting a branch.