When you want to pay off credit cards or other high-interest balances, two borrowing options come up again and again: a personal loan vs a line of credit. Both can cut your interest costs compared with a credit card, but they work very differently. Choosing the wrong one can mean paying more, or staying in debt longer than planned.
This guide compares the two for Canadians who want to get out of debt, with the pros, the risks and a simple way to decide.
How a Personal Loan Works
A personal loan (also called an instalment loan) gives you a fixed amount of money once. You repay it over a set term, often a few years, with regular payments that include principal and interest. Many personal loans have a fixed interest rate, so your payment stays the same until the loan is paid off.
How a Line of Credit Works
A personal line of credit is revolving credit. The lender approves a limit, and you can borrow, repay and borrow again up to that limit. Interest is charged only on the amount you use. Rates are usually variable, tied to the lender’s prime rate, and minimum payments can be as low as interest only, depending on the product.
Side-by-Side Comparison
| Feature | Personal loan | Line of credit |
|---|---|---|
| Structure | Lump sum, fixed term | Revolving, reusable limit |
| Interest rate | Often fixed | Usually variable |
| Payments | Fixed, includes principal | Flexible, can be interest only |
| End date | Clear payoff date | No forced payoff date |
| Discipline needed | Lower | Higher |
| Best for | Consolidating a known balance | Irregular expenses, short-term needs |
When a Personal Loan Is the Better Choice
For most people trying to get out of debt, the structure of a personal loan is its biggest advantage. Because payments include principal, the debt actually shrinks every month, and you know exactly when you will be debt-free. This makes it a good tool for debt consolidation in Canada when you have a clear total to pay off.
The main risk: if you consolidate your cards into a loan and then use the cards again, you end up with both debts. Many people close or freeze cards after consolidating for this reason.
When a Line of Credit Makes Sense
A line of credit can be cheaper if your rate is low and you are disciplined. It works well when you need flexibility, for example to cover an irregular expense, or if you plan to repay quickly. The danger is that interest-only minimums let a balance sit for years. If you choose a line of credit to pay off debt, set up an automatic payment that is higher than the minimum and treat it like a loan.
A home equity line of credit (HELOC) usually offers lower rates but uses your home as security. We cover that option and its risks in using a HELOC to pay off debt.
How Your Credit Score Affects Both
The rate you are offered depends heavily on your credit history, income and existing debt. If your debt-to-income ratio is high, approval may be harder or the rate may be too high to help. Calculate yours with our guide on the debt-to-income ratio in Canada before you apply.
Questions to Ask Any Lender
- What is the annual interest rate, and is it fixed or variable?
- Are there setup fees, annual fees or prepayment penalties?
- What is the minimum payment, and does it include principal?
- Is the credit secured or unsecured?
- What happens if I miss a payment?
The Financial Consumer Agency of Canada explains your rights when borrowing on canada.ca.
A Simple Way to Decide
- Add up the exact balance you want to pay off.
- Compare the total interest over the same payoff period for each offer.
- If you need a forced structure, choose the personal loan.
- If you choose a line of credit, commit to a fixed monthly payment that clears it by a target date.
To compare payments and total interest quickly, try the Canadian loan and finance calculators on our calculator site.
If borrowing is not an option because your debt is too high, look at alternatives like a debt management plan or a consumer proposal.
FAQ
Is a line of credit cheaper than a personal loan?
Often the rate is lower, especially if secured, but the total cost depends on how fast you repay. Interest-only payments can make it more expensive over time.
Will consolidating hurt my credit score?
A new application can cause a small, temporary dip. Paying down card balances and making on-time payments can help over time.
Can I get a personal loan with bad credit?
Possibly, but rates may be high. Compare carefully and avoid offers that cost more than your current debt.
Should I close my credit cards after consolidating?
Closing can affect your credit utilization, but keeping them open is risky if you are tempted to use them. Many people keep one card for emergencies and freeze the rest.
