Line of Credit vs Personal Loan for Debt Consolidation: Which Saves More in 2026?

Choosing between a line of credit and a personal loan for debt consolidation comes down to one question: do you value rate certainty or initial savings? Personal loans lock in fixed rates between 6-15% with structured payments that force you debt-free in 3-5 years. Lines of credit start 1-2% cheaper at prime+2-7% (currently 6.45-11.45%) but expose you to rate fluctuations and the temptation to re-borrow. If you’re consolidating $10K at 9% fixed, you’ll pay $207 monthly and clear the balance in 60 months. That same $10K on a 6.45% LOC requires just $54 in monthly interest—but without forced principal payments, you could carry that debt for years.

The catch is discipline and rate risk. When prime jumped 1.75% between April 2022 and July 2023, Canadians with $25K LOCs saw monthly minimums spike by $36. Meanwhile, personal loan holders kept the same payment. Your credit score matters too: banks approve personal loans starting at 600, but LOCs typically demand 660+.

Line of Credit vs Personal Loan: Key Differences for Debt Consolidation

A personal loan gives you one lump sum upfront with a fixed repayment schedule—typically 3-5 years, though some lenders offer 2-7 year terms. You receive $5K-$50K depending on your credit and income, then make identical monthly payments until the balance hits zero. Interest rates stay locked regardless of what the Bank of Canada does. Most loans charge 3 months’ interest as a prepayment penalty, though many include 10-20% annual prepayment privileges.

A line of credit works like a credit card without the plastic. You’re approved for a limit (usually $10K-$50K or higher), draw what you need, and pay interest only on the borrowed amount. Rates float with prime—currently 4.45% as of the Bank of Canada’s January 28 hold—plus a spread of 2-7% based on your credit. Minimum payments cover interest only, meaning your principal shrinks only when you choose to pay extra. You can re-borrow up to your limit at any time without reapplying.

Here’s what actually differs day-to-day. With a personal loan, you set up automatic payments and forget about it—your balance drops every month whether you think about it or not. With a LOC, you decide each month how much to pay beyond the interest minimum. That flexibility helps if your income fluctuates, but 63% of LOC holders re-borrow within the first year, extending their debt timeline indefinitely.

The repayment psychology matters more than most people expect. Structured loans force progress. Open-ended LOCs require willpower most people overestimate.

Interest Rates & Monthly Costs: Real Numbers on $10K, $25K, $50K Debt

Personal loan rates in February 2026 range from 6% (excellent credit at major banks) to 25% (poor credit at alternative lenders). You’ll typically pay 7-12% at 660+ credit, 12-18% at 600-649, and 18-25% below 600. These rates stay fixed for your entire loan term.

LOC rates start with Canada’s prime (4.45% today) and add 2-7% depending on whether your credit score sits at 680+ or just clears 660. Unsecured LOCs from major banks charge prime+2-3% for excellent credit (6.45-7.45% total), prime+4-5% for good credit (8.45-9.45%), and prime+5-7% for fair credit (9.45-11.45%). Credit unions often beat bank rates by 0.5-1%.

Monthly Payment Comparison

The total cost tells the real story. That $10K personal loan at 9% costs $2,420 in interest over five years. The LOC at 6.45% would cost $1,653 if you matched the personal loan’s payment schedule and rates stayed flat. But if prime climbs 1% in year two, your savings evaporate. If prime rises 2%, the LOC costs more than the fixed loan.

Here’s the reality most people miss: LOC interest-only minimums feel affordable but accomplish nothing. You’re renting your debt, not eliminating it.

Take Devon from Lethbridge with $18,400 in credit card debt at 19.99%. His minimum payments total $368 monthly but only $61 goes to principal—he’d need 47 years to pay it off. A personal loan at 10% fixed costs $391 monthly and clears the debt in 60 months, saving $31,180 in interest. A LOC at 7.25% would save even more if he paid $391 monthly and rates held steady, but required the discipline to maintain those payments when only $111 was technically due.

Compare personal loan rates from 12+ Canadian lenders in 3 minutes →

Approval Requirements: Credit Scores, Income & Debt-to-Income Limits

Personal loans start accepting applications at 600 credit scores, though your rate depends heavily on where you land. At 660+, major banks offer competitive rates around 8-12%. Between 600-649, you’re looking at 12-18% from banks and credit unions. Below 600, alternative lenders charge 18-25% and may require collateral or a co-signer.

Lines of credit demand higher standards. Most banks won’t approve unsecured LOCs below 660 credit. Your best rates (prime+2-3%) kick in at 680+. Credit unions show more flexibility, sometimes approving LOCs at 640+ with slightly higher spreads.

Both products scrutinize your debt-to-income ratio—your total monthly debt payments divided by gross monthly income. Federally regulated lenders cap this at 35%, though some allow up to 41% for excellent credit. If you earn $5,000 monthly gross and already pay $1,500 toward debts, you’re at 30% DTI—tight but workable. Add a $500 consolidation loan payment and you hit 40%, pushing you out of range for most lenders.

Income verification requires 2-3 recent pay stubs and 2 months of bank statements for employed applicants. Self-employed Canadians need 2 years of Notices of Assessment plus 6 months of business bank statements. Some lenders want to see 6+ months of stable employment; credit unions often accept 3 months.

Approval rates vary by institution. Major banks approve roughly 60% of applications at 660+ credit but only 30% at 600-649. Credit unions approve about 70% at 640+ because they evaluate full financial pictures rather than strictly credit scores. Online lenders approve 75%+ but charge premium rates.

The timeline differs too. Personal loans typically deliver decisions in 1-3 business days and fund within 2-5 days—total 3-10 days. LOCs take longer: 2-5 days for approval, then 3-7 days to set up access—total 5-14 days.

Denials usually stem from four causes: credit score too low (40% of denials), DTI too high (30%), unstable or insufficient income (20%), or thin credit history (10%). If you’re denied, wait 6 months to build your file before reapplying—multiple applications within short windows beyond the 14-day rate-shopping window damage your score further.

When a Personal Loan Beats a Line of Credit (4 Scenarios)

You need payment certainty and sleep at night. If your budget can’t absorb a $40-60 monthly increase when prime rates jump, fixed payments protect you. The Bank of Canada held rates at 2.25% on January 28, but forecasts show potential volatility through Q3 2026 depending on inflation and US trade policy. When prime climbed 1.75% between April 2022 and July 2023, LOC holders with $30K balances saw minimum payments rise $44 monthly. Personal loan holders paid the same amount they’d paid all along.

You need forced discipline to actually eliminate debt. Revolving credit invites re-borrowing. You pay down $5K on your LOC, then your car needs repairs or property taxes come due, and suddenly you’ve drawn that $5K back. Research shows 63% of LOC holders re-borrow within the first year, with the average user maintaining 72% of their original balance after 18 months. Structured personal loans prevent this—once you pay $5K down, it’s gone for good. You reach $0 in 3-5 years because you can’t access those funds again.

You’re consolidating high-interest debt and every point matters. If you’re paying 19.99% on credit cards or 24.99% on retail financing, even a 12% personal loan cuts your interest by 40-65%. Your priority is locking in savings immediately, not chasing the lowest possible rate with variable exposure. A $15K balance at 19.99% costs $3,000 annually in interest. Drop that to 10% fixed via personal loan and you’re paying $1,500—saving $1,500 every year regardless of economic conditions.

Your credit sits between 600-649 and LOC approval looks unlikely. Personal loans offer an easier path forward. While banks hesitate on LOCs below 660, they approve personal loans at 600+ regularly—you’ll pay 12-18% versus the 8-10% that excellent credit earns, but you’ll consolidate today rather than spending 6-12 months building your score first.

Consider Natalie from Kamloops with $23,700 across four credit cards at an average 21.5% APR. Her credit score of 638 qualified her for a personal loan at 13.5% fixed over 5 years—monthly payment $548. Her previous minimums totaled $474 but barely touched principal. The loan costs $9,180 in interest versus $34,920 if she’d kept paying minimums for the 12+ years it would’ve taken. She saves $25,740 and knows her exact payoff date.

Get pre-approved for a personal loan without affecting your credit →

When a Line of Credit Beats a Personal Loan (3 Scenarios)

Your credit score hits 680+ and you qualify for prime+2-3% rates. At 6.45-7.45% variable, you’re starting 1.5-3% below most personal loans. If you commit to aggressive payments—say $800 monthly on a $20K balance—you’ll clear the debt in roughly 26 months and save approximately $1,800-2,400 in interest versus a 5-year personal loan at 9%. The key is maintaining those payments even when your minimum drops to $108.

You need ongoing flexibility without reapplying constantly. Personal loans require fresh applications and credit checks each time you need money. If you’re consolidating $15K today but expect a $3K property tax bill in six months, a $20K LOC covers both without additional paperwork. You pay interest only on the $15K until you draw the extra $3K. For self-employed professionals or commission-based workers with variable income, this flexibility prevents missed payments during lean months—you can drop to interest-only minimums temporarily without defaulting.

You can pay aggressively and want to maximize interest savings. LOCs charge no prepayment penalties, while personal loans often assess 3 months’ interest if you pay off early. If you receive a $10K bonus, inheritance, or tax refund, applying it to your LOC saves interest immediately. A $25K balance at 7.25% costs roughly $151 monthly in interest; drop it to $15K with a lump payment and you’re paying $91 monthly going forward. Personal loans keep charging interest on the original amortization schedule despite early payments unless you renegotiate terms.

Think about Marcus from Burlington with $31,200 in mixed debt and a 712 credit score. His credit union approved a $35K LOC at prime+2.25% (6.70% total). He budgeted $1,400 monthly plus quarterly $2,500 lump sums from his sales bonuses. By month 24, he’d cleared the balance and paid $3,640 in total interest. The comparable personal loan at 8.5% over 5 years would’ve cost $7,580 in interest—he saved $3,940 by leveraging his LOC’s flexibility and his own discipline.

The mistake to avoid: choosing a LOC for the low interest-only minimum when you lack the discipline or cash flow to pay principal. That’s how $20K in consolidated debt becomes permanent.

Rate Risk: Fixed vs Variable in 2026’s Uncertain Market

Canada’s overnight rate sits at 2.25% after the Bank of Canada held steady on January 28, 2026. Prime rate—which all variable LOCs track—sits at 4.45% across major banks. Forecasts for Q2-Q3 2026 show potential rate cuts if inflation stays below the 2% target, but uncertainty around US trade policy and tariff impacts could change that quickly.

Here’s what rate movements mean for your actual payments. Every 1% increase in prime raises your LOC payment by roughly $20-25 monthly per $25K borrowed. A 2% jump costs you $40-50 monthly on that same balance. Your $453 monthly payment on a $25K LOC at 6.45% becomes $494 at 8.45%—an extra $492 annually. Personal loans ignore these fluctuations entirely.

The break-even calculation matters. Say you’re choosing between a personal loan at 9% fixed and a LOC starting at 6.45% variable. The LOC starts $40-50 cheaper monthly on $25K. But if prime rises just 1.5% within the first 18 months, your LOC rate hits 7.95%—nearly matching the personal loan’s rate. You’ve saved maybe $600-700 in those early months, but now you’re exposed to further increases while the personal loan stays locked.

Historical context: between March 2020 and July 2023, prime moved from 2.45% to 6.70%—a 4.25% swing. A $30K LOC holder saw minimum payments climb from roughly $61 monthly (interest-only at 2.45%) to $167 monthly (interest-only at 6.70%). That’s a $106 monthly shock, or $1,272 annually, assuming they never paid principal.

Your tolerance for uncertainty determines your choice. If you’re one unexpected expense away from missing payments, that fixed personal loan rate becomes insurance against financial chaos. If you’ve got $2K monthly cushion in your budget and can absorb $50-100 swings in your debt payment, the LOC’s lower starting rate saves real money.

Most people overestimate their risk tolerance when rates are stable and underestimate payment shock when rates spike.

Application Process & Timeline: What to Expect

Both applications start online or in-branch and take 20-30 minutes to complete. You’ll provide your personal information, employment details, income, existing debts with balances, and authorize a credit check. That credit inquiry typically drops your score 5-10 points temporarily—it recovers within 6-12 months.

Personal loans move faster from approval to funding. Most lenders deliver decisions within 1-3 business days. Simple applications with strong credit get approved same-day or next-day; complex files (self-employed, lower credit, high DTI) can take 3-5 days. Once approved, funding hits your account in 2-5 business days. Total timeline: 3-10 days from application to money in hand. Online lenders and credit unions typically move faster than major banks.

Lines of credit take longer to set up even after approval. Expect 2-5 days for a credit decision, then another 3-7 days to establish your account, set up access (checks, transfers, online banking), and link to your existing accounts. Total timeline: 5-14 days. The extra time comes from setting up revolving access rather than just depositing a lump sum.

Documents you’ll need for both: government-issued photo ID, 2-3 recent pay stubs, 2 months of bank statements, and a list of all debts you’re consolidating with account numbers and balances. Self-employed applicants add 2 years of Notices of Assessment and 6 months of business bank statements. Some lenders request additional proof like a void cheque or recent utility bill to confirm your address.

Rate shopping works in your favor if you’re strategic. Credit bureaus treat multiple loan inquiries within a 14-day window as a single inquiry, letting you compare offers without compounding credit damage. Apply with 3-4 lenders in the same two-week period, review all offers, then choose. Spreading applications across several months triggers multiple hard inquiries and damages your score unnecessarily.

Denials happen. If you’re rejected, request the specific reason in writing. Address that issue—pay down debt to lower DTI, wait 6 months for your credit to improve, or increase your income through a side job—before reapplying. Repeated applications within 60 days make you look desperate and lower approval odds further.

One reality check: online lenders approve faster but charge 1-3% more than credit unions. If you need money in 48 hours, you’ll pay for that speed. If you can wait 10-14 days, credit unions often deliver better rates and more flexible underwriting.

Your Next Step: Calculate Your Actual Costs

Start by pulling your free credit report through Borrowell or Credit Karma to confirm your score—your rate depends entirely on that three-digit number. Calculate your debt-to-income ratio by adding all monthly debt payments and dividing by your gross monthly income. If you’re above 35%, you’ll need to pay down some debt before consolidating the rest, or consider a secured option like a HELOC.

Request rate quotes from at least three lenders within a 14-day window: your bank, a credit union, and an online lender. Ask for both personal loan and LOC rates. For LOCs, specifically ask what your rate would be (prime plus what spread?) and confirm whether they report to credit bureaus monthly—some don’t, which can hurt your credit building efforts.

Model both scenarios using realistic assumptions. Take your personal loan rate and calculate the exact monthly payment. Then take the LOC rate and calculate what happens if prime rises 1% or 2% during your repayment period. If that payment increase breaks your budget, you need the fixed rate. If you’ve got room for fluctuation and the discipline to pay aggressively, the LOC wins.

The mistake most people make: choosing based on the lowest advertised rate without considering their own behavior patterns. If you’ve never successfully paid off a credit card balance—always spending back to the limit—you’ll do the same with a LOC. Be honest about your track record. Fixed payments remove temptation.

One more consideration: your timeline. If you can realistically pay off your debt in 2-3 years with aggressive payments, a LOC’s flexibility and lower rate make sense. If you need 4-5+ years to manage the payments, the personal loan’s structure keeps you on track when motivation fades.

Use our calculator to compare personal loan vs LOC total costs based on your specific debt →

The right choice depends on your credit, your budget, and your honest assessment of your own financial discipline. Most Canadians with good credit and consistent income save more with LOCs. Most Canadians with tight budgets or past struggles with revolving credit do better with personal loans’ forced structure. Run the numbers for your situation, not an average scenario.