Loan or Line of Credit?

Should You apply for a loan or a line of credit? What is the difference?

This is a common question I get from clients when they are looking to borrow money. Below, I've compiled some information to simplify what a loan is, what a line of credit is, and when might make sense for you to use each?

What is a Loan?

A loan lets you borrow a specific amount of money in one lump sum. It’s ideal for single transactions, such as major purchases, home renovations or paying off old debts. Your loan plus interest gets repaid over an agreed-upon length of time.

What is a Line of Credit?

A line of credit gives you ongoing access to funds that you can use and re-use as needed. You’re charged interest only on the amount you use. A line of credit is ideal when your cash needs can increase suddenly, such as with home renovations or education.

According to Government of Canada:

Pros and cons of a line of credit

Pros

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

Cons

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

Which one is best for you?

Do you have a well-defined borrowing need with a particular end goal – such as buying a car, consolidating debt or another major expense? Then a loan might be a better option. It provides a lump sum of money up front. You can choose a fixed or variable interest rate… and select your payment frequency ranging from weekly to biweekly, semi-monthly or monthly.

If, on the other hand, you need the flexibility to borrow for a variety of needs, without having to reapply every time, then a line of credit may be a better option – as the funds up to your available credit limit are there, whenever you want! And you only pay interest on what you use.

Examples of a when you may want to use a loan:

• Purchasing a vehicle, or other asset.
• Consolidating debts (ex. credit card debts).

Examples of when you may want to use a line of credit:

• Student/Education expenses.
• larger short-term expenses you can pay off within a few months.

As always, speak with a qualified financial professional to ensure you are choosing a product that is right for your individual circumstances.

For more information, visit TD or Government of Canada