Last updated: March 2025 — A line of credit is revolving credit that lets you borrow up to a set limit, repay it, and borrow again. Current personal LOC rates range from prime + 3% to prime + 7% (approximately 9.95%–15.95% in 2025), while HELOC rates start at prime + 0.5% (approximately 7.45%).
What Is a Line of Credit?
A line of credit (LOC) is a revolving credit facility with a set maximum limit. Unlike a term loan where you receive a lump sum and repay on a fixed schedule, a line of credit lets you draw funds as needed, repay, and draw again — all within your credit limit. You only pay interest on the amount you've actually drawn, not the full limit.
Example: A $20,000 personal LOC at 9.95%. If you draw $5,000, you pay interest only on $5,000 (approximately $41/month). Repay $3,000, and you're paying interest on $2,000. Draw again when you need funds up to your $20,000 limit.
Types of Lines of Credit in Canada
Personal Line of Credit (Unsecured)
A personal LOC is an unsecured revolving credit facility from a bank or credit union. Limits typically range from $5,000 to $50,000. Rates are variable, tied to the lender's prime rate, and require good credit (660+) for approval. Personal LOCs are ideal for emergency funds, home renovations, and cash flow management.
Home Equity Line of Credit (HELOC)
A HELOC is secured against your home's equity, allowing borrowing at much lower rates than unsecured credit. In Canada, you can borrow up to 65% of your home's appraised value in a HELOC (combined with your mortgage, can't exceed 80% LTV). Current HELOC rates: prime + 0.5% = approximately 7.45%. For homeowners, a HELOC is almost always the lowest-cost credit available.
Student Line of Credit
Professional student lines of credit are offered by banks for students in professional programs (medicine, law, dentistry, MBA). These have very high limits ($150,000–$350,000 for medicine) at prime rate with interest-only payments during studies. This is one of the most favourable forms of credit available in Canada.
Business Line of Credit
Businesses use operating lines of credit to manage cash flow. Rates and terms vary significantly based on business financials, security, and bank relationship. Not covered in this guide (personal finance focus).
Current Line of Credit Rates in Canada 2025
| Product | Rate (Approximate 2025) | Typical Limit | Requires |
|---|---|---|---|
| HELOC | Prime + 0.5% (~7.45%) | Up to 65% of home value | Home equity, 20%+ equity position |
| Bank Personal LOC (good credit) | Prime + 3–4% (~9.95–10.95%) | $5,000 – $50,000 | 700+ credit score |
| Bank Personal LOC (fair credit) | Prime + 5–7% (~11.95–13.95%) | $2,000 – $20,000 | 650–699 credit score |
| Credit Union LOC | Prime + 2–5% (~8.95–11.95%) | $1,000 – $35,000 | 620+ credit score (member) |
| Student LOC (professional) | Prime (~6.95%) | $150,000–$350,000 | Enrollment in qualifying program |
Note: Canada's prime rate as of early 2025 is approximately 6.95% (Bank of Canada policy rate 3.0% + 2.45% spread). See current prime rate.
HELOC vs Personal Line of Credit
| Feature | HELOC | Personal LOC |
|---|---|---|
| Rate | Prime + 0.5% (~7.45%) | Prime + 3–7% (~9.95–13.95%) |
| Limit | Up to 65% home value | $2,000–$50,000 |
| Security | Your home | None (unsecured) |
| Approval time | 2–4 weeks (appraisal required) | Days to 1 week |
| Risk of default | Can lose home | Credit score damage only |
| Qualification | Homeowner with 20%+ equity | Good credit, stable income |
| Minimum payment | Interest only | Interest only (or minimum) |
How Interest Is Calculated on a Line of Credit
Line of credit interest is calculated daily on the outstanding balance. The formula is:
Daily interest = Balance × (Annual Rate ÷ 365)
Example: $100 balance at 9.95% APR = $100 × (9.95% ÷ 365) = $2.73/day = approximately $83/month in interest.
Because interest is calculated daily, making a payment early in the month reduces your daily balance and therefore your monthly interest charge — unlike a term loan where interest is calculated monthly on the beginning balance.
Line of Credit vs Personal Loan
Choose a line of credit when:
- Your needs are ongoing or uncertain (home renovation, variable expenses)
- You want the flexibility to repay and re-borrow
- You're managing cash flow for a business or variable income
- You want an emergency fund in place without carrying a balance
Choose a personal loan when:
- You need a specific lump sum for a defined purpose (debt consolidation)
- You want a forced repayment schedule
- You might be tempted to re-borrow a LOC repeatedly
- Fixed rate certainty is important to you
Qualifying for a Line of Credit
Personal LOC Requirements
- Credit score: 660+ for standard rates; 700+ for best rates
- Stable income: typically 2+ years employment or self-employment
- TDS ratio under 40%: total debt payments (including new LOC minimum) shouldn't exceed 40% of gross income
- Clean credit history: no recent collections, judgments, or consumer proposals
HELOC Requirements
- Home equity: at least 20% equity (or LTV of 80% or less after HELOC is added)
- Credit score: 680+ typically
- Stable income: to service the HELOC at current rates
- Property appraisal: lender will order an appraisal of your home
Tax Deductibility of LOC Interest
Interest on a personal LOC used for personal spending is not tax deductible. However, if you use LOC funds to earn income (investment, business, or rental income), the interest is generally tax deductible as an investment or business expense. The "Smith Manoeuvre" is a strategy some Canadians use to convert mortgage interest into tax-deductible investment LOC interest — consult a tax professional if interested.
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Does having a line of credit hurt my credit score?
Having a LOC can help your credit score by increasing your available credit limit (lowering utilization ratio) and adding to your credit mix. However, applying for a LOC triggers a hard credit inquiry (small temporary score reduction), and high utilization of your LOC limit hurts your score. Keep LOC usage below 30% of the limit for optimal credit score impact.
Can I close my line of credit?
Yes — you can close a LOC at any time after paying the balance to $0. However, closing a LOC reduces your available credit limit, which can increase your credit utilization ratio and slightly reduce your credit score. Consider keeping it open (unused) if you've had it for a long time.
What happens if I miss a LOC payment?
Missing a minimum payment results in a late payment fee ($25–$50) and a negative mark on your credit report. If you're consistently delinquent, the lender can freeze your LOC (preventing further draws) and eventually pursue collection. Unlike a mortgage, there's no foreclosure risk with an unsecured personal LOC — but credit damage is significant.
See also: Home Equity Loans Canada | Personal Loans | Debt Consolidation | Current Loan Rates