Line of Credit
Marge de crédit in French
Quick definition
A line of credit is revolving credit: you can draw money, repay it, and draw again up to a preset limit, paying interest only on the balance you actually carry. The rate usually floats at the lender's prime rate plus a spread.
How revolving credit works
A line of credit (LOC) is approved once and then sits there. Draw $5,000 today, repay $2,000 next month, draw again in the spring: as long as you stay under the limit, the credit renews itself, which is what revolving means. Interest accrues daily, but only on the outstanding balance, and a line with a zero balance costs nothing at most lenders.
Pricing is almost always floating: the prime rate plus a spread that reflects your credit score and, above all, whether the line is secured. When prime moves, your rate moves with it, in both directions.
The varieties
The same revolving structure comes in several packages:
- Unsecured personal line. No collateral, so the highest LOC rates, though still usually well below credit card rates.
- Home equity line. A HELOC is secured by your house, which makes it the cheapest borrowing most households can get. The low rate exists precisely because your home stands behind the debt.
- Student line. Offered to students in longer professional programs, typically with interest-only payments while studying.
- Business line. The classic working capital tool: it bridges the gap between paying suppliers today and collecting from customers next month.
Minimum payments: the balance that never shrinks
Most lines require only the month's interest as the minimum payment. That is the feature that quietly turns a line of credit into permanent debt: pay the minimum forever and the balance never falls by a single dollar. Even a credit card's minimum chips away at some principal; a pure interest-only line does not. If you carry a balance, set your own fixed monthly payment and treat the line like a loan, because the lender will not do it for you.
Line of credit vs credit card vs term loan
Each tool has a niche. A card wins for short-float convenience and rewards, a line for flexible borrowing at a lower rate, which is also why it is a common vehicle for debt consolidation, and a term loan for borrowing that should provably end.
| Feature | Credit card | Line of credit | Term loan |
|---|---|---|---|
| Rate level | High | Low to medium | Low to medium |
| Structure | Revolving, grace period on purchases | Revolving, interest from day one | Fixed payments, set end date |
| Minimum payment | Small, includes some principal | Often interest only | Blended, always repays principal |
| Discipline required | High | Highest | Built into the schedule |
The flexibility trap
The flexibility that makes a line useful is also what makes it dangerous. Balances born as temporary, a renovation overrun, a slow quarter, a stretch between jobs, have a way of becoming permanent, and a floating rate that looked harmless at the start can climb while the balance sits there. A line of credit is a bridge; if you notice it has become a road, it is time for a repayment plan with an end date.
A related habit is keeping no cash emergency fund and counting on the line instead. It works until it does not: a line is not committed money. The lender can reduce or freeze the limit, and the moments it is most tempted to, a recession, falling home prices, a job loss, are exactly when you would need it. Credit is a good backup to savings, not a replacement.
In Canada
HELOCs are a defining feature of Canadian household borrowing, often packaged with a mortgage as a readvanceable combination where the credit limit grows as the mortgage is paid down. Federal rules cap the revolving portion of a HELOC at 65% of the home's value, and lenders can trim limits on their own if home values fall. One tax note: interest on a line is only deductible when the borrowed money earns income, and the CRA traces what each draw paid for, so avoid mixing personal and investment borrowing on one line.
Worked example
Sam draws $20,000 on a personal line for a kitchen renovation, planning to repay it within a year. The minimum payment is interest only, comfortably small, so that is what he pays. Three years later the kitchen is aging nicely and the balance is still exactly $20,000. He finally sets a fixed payment of $600 a month, ignores the smaller minimum on the statement, and clears the line in about three years. The lender never asked him to; the minimum was designed to keep the balance alive, not to kill it.
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026