How a Line of Credit Actually Works in Canada

A line of credit sounds simple: the bank approves you for an amount, you borrow what you need, and you pay interest only on what you use. That flexibility is exactly why lines of credit are one of the most common borrowing products in Canada — and, according to recent industry data, one of the fastest-growing categories of consumer debt in the country.

But there's a mechanical detail buried in the fine print of almost every line of credit agreement that catches people off guard: the minimum payment is usually just the interest for that month. Nothing more. Canada's Financial Consumer Agency (FCAC) is direct about what that means — pay only the minimum, and interest gets paid indefinitely, because the amount actually owed never goes down.

Why it matters

Understanding this one mechanic — interest-only minimums — is arguably more important than knowing the interest rate. A line of credit at a lower rate than a credit card can still cost more over time if the principal never gets paid down, because that balance can be carried for years, sometimes indefinitely.

This isn't a hypothetical risk. Recent TransUnion data shows outstanding line-of-credit balances growing faster year-over-year than credit card balances — one of the quickest-growing categories of consumer debt in the country. Understanding how the product actually works is the difference between using it as a flexible tool and slowly sinking into it as a permanent liability.

How a line of credit works, step by step

1. The approval is for a limit, not a lump sum. Unlike a personal loan, where the full amount arrives upfront, a line of credit gives access to a maximum borrowing limit. None of it has to be used right away, and no interest is charged on money that hasn't been drawn.
2. Interest is calculated daily, on what's actually owed. Most Canadian lines of credit use simple daily interest: outstanding balance × (annual interest rate ÷ 365), added up and billed monthly. Borrow $5,000 and pay it back the next day, and the cost is roughly one day's interest — not a full month's worth.
3. It's revolving, not one-time. As what's drawn gets repaid, that room becomes available again without a new application. This is the core difference from a personal loan, which is a one-time amount repaid on a fixed schedule until it's gone.

4. The minimum payment is usually interest-only.

   This is the detail that matters most. On most unsecured personal lines of credit, the minimum monthly payment required to keep the account in good standing is the interest charged that month — not the interest plus a portion of principal. FCAC states this plainly in its consumer guidance: pay only the minimum, and the balance itself never shrinks.
5. There's typically no fixed end date. Many lines of credit don't have a defined repayment period the way an installment loan does. As long as minimum payments are made, the account can, in principle, stay open with an outstanding balance indefinitely.

A realistic example

Say a borrower draws $8,000 on a personal line of credit at an annual rate of 9.45% (roughly prime plus 5%, a realistic mid-range rate as of late 2026). The interest-only minimum payment on that balance is a little over $60 a month.

Compare that to putting even an extra $100 a month toward principal: the same $8,000 balance would be paid off in under seven years, with total interest cost far lower, because the balance the interest is calculated on keeps shrinking.

When interest-only payments are actually a reasonable choice

The interest-only structure isn't inherently bad — it's designed for short-term, temporary borrowing where the borrower has a clear plan to repay the principal relatively quickly. Legitimate uses include:

• Bridging a gap, such as covering moving costs between selling one home and closing on another, where the balance will be cleared in weeks.
• Staged project costs, like a home renovation billed in phases, where funds are drawn only as each phase is invoiced and paid off as insurance or savings come in.
• A true emergency buffer, used rarely and paid off quickly, rather than a routine source of extra monthly spending money.

The pattern to watch for is the shift from "temporary, planned borrowing" to "permanent revolving debt with no repayment plan." That shift is where the interest-only minimum becomes a genuine financial trap rather than a useful tool.

Common mistakes

• Treating the credit limit as available income. A $20,000 limit is borrowing capacity, not money that belongs to the borrower. Spending up to the limit because it's there is one of the most common ways lines of credit turn into long-term debt.
• Paying only the minimum, indefinitely. As shown above, this can mean paying interest for years without ever reducing what's owed.
• Not tracking the daily interest impact of carrying a balance. Because interest compounds daily on the outstanding amount, even small ongoing draws add up faster than many borrowers expect.
• Closing an old, unused line of credit without checking the credit-score impact first. Closing accounts can sometimes raise a credit utilization ratio and lower a score, even when the intention was to be financially responsible.
• Assuming a lower rate always means lower cost. A line of credit's lower advertised rate compared to a credit card can be misleading if the balance is never paid down; over a long enough period, a smaller rate on a permanent balance can cost more in total interest than a higher rate on a balance actively being paid off.

Sources

• Financial Consumer Agency of Canada, "Lines of credit"
• Bank of Canada, policy interest rate

This article is for general educational purposes and does not constitute financial or legal advice. Interest rates, product terms, and lender policies referenced here can change; confirm current details directly with your financial institution or a qualified financial professional before making borrowing decisions.

What to do next

Checking whether a current or planned line of credit balance is being paid down, or only kept at the interest-only minimum, is the single most useful thing to confirm after reading this. For how a line of credit compares against a credit card and a personal loan on actual cost, see Line of Credit vs. Credit Card vs. Personal Loan: What's Actually Cheaper in 2026. For the specific borrowing limits that apply when a line of credit is secured against a home, see HELOC Debt Just Hit a New High: What Every Canadian Homeowner Needs to Know About the 65% Rule.