How to Calculate Interest on a Line of Credit
This calculator helps you estimate the interest cost on your line of credit. Interest on a line of credit in Canada is calculated daily on the outstanding balance and charged to your account monthly.
The daily interest formula is:
$$\text{Daily Interest} = \text{Outstanding Balance} \times \frac{\text{Annual Interest Rate}}{365}$$
Worked Example: Daily Interest Calculation
Suppose you have a $15,000 balance on a line of credit at 7.45% annual interest:
| Step | Calculation | Result |
|---|---|---|
| 1. Daily rate | 7.45% ÷ 365 | 0.02041% |
| 2. Daily interest | $15,000 × 0.0002041 | $3.06 |
| 3. Monthly interest (30 days) | $3.06 × 30 | $91.78 |
| 4. Annual interest (if unchanged) | $3.06 × 365 | $1,117.50 |
If you pay down $5,000 of the balance on day 15, the remaining 15 days of the month would be charged on only $10,000:
- Days 1–15: $15,000 × 0.0002041 × 15 = $45.92
- Days 16–30: $10,000 × 0.0002041 × 15 = $30.62
- Total monthly interest: $76.54 (compared to $91.78 without the payment)
This daily calculation means that making payments sooner — even mid-month — reduces your interest cost immediately.
What is a Line of Credit and How Does it Work?
A line of credit (LOC) provides you with access to funds up to an approved credit limit. Unlike a personal loan where you receive a lump sum, a line of credit is revolving — you can borrow, repay, and borrow again as often as needed.
While there is an outstanding balance on your line of credit, you are required to make interest payments. Many lines of credit also require a minimum monthly payment, typically the greater of the interest owed or a small percentage of the balance (often 2–3%).
In Canada, line of credit interest rates are typically based on the prime rate plus a markup. This means the rate is variable — when the Bank of Canada changes its policy rate, your line of credit rate changes too. If your balance is large, even a small rate change can significantly affect your monthly interest cost.
Typical Line of Credit Rates in Canada
| Type of Line of Credit | Typical Rate Range (2026) | Typical Credit Limit |
|---|---|---|
| Secured (HELOC) | Prime + 0.50% to 1.00% (6.20% – 6.70%) | Up to 65% of home value |
| Secured (other collateral) | Prime + 0.50% to 2.00% (6.20% – 7.70%) | Up to value of collateral |
| Unsecured (excellent credit) | Prime + 1.50% to 3.00% (7.20% – 8.70%) | $5,000 – $50,000 |
| Unsecured (good credit) | Prime + 3.00% to 5.00% (8.70% – 10.70%) | $5,000 – $35,000 |
| Unsecured (fair credit) | Prime + 5.00% to 9.00% (10.70% – 14.70%) | $1,000 – $15,000 |
Rates assume a prime rate of 5.70% as of 2026. Actual rates vary by lender and individual circumstances.
The rate you receive depends on your credit score, income, the type of line of credit, and your relationship with the lender. Credit unions often offer competitive rates, especially for members with an established history.
Secured vs Unsecured Lines of Credit
A secured line of credit is backed by collateral — most commonly your home in the form of a home equity line of credit (HELOC). Because the lender has security, interest rates are significantly lower, and borrowing limits are much higher.
An unsecured line of credit has no collateral backing it. The lender relies entirely on your creditworthiness, so rates are higher and limits are lower.
| Feature | Secured (HELOC) | Unsecured LOC |
|---|---|---|
| Collateral | Home equity | None |
| Interest rate | Prime + 0.5% to 1% | Prime + 2% to 5%+ |
| Credit limit | Up to 65% of home value | $1,000 – $50,000 |
| Risk to borrower | Home at risk if you default | No asset at risk |
| Qualification | Home ownership, equity, credit check | Credit check, income verification |
| Best for | Large ongoing expenses (renovations, investing) | Emergency fund, shorter-term needs |
Line of Credit vs Credit Card
Many Canadians use both a line of credit and credit cards, but they serve different purposes:
| Feature | Line of Credit | Credit Card |
|---|---|---|
| Interest rate | 6% – 15% (variable) | 19.99% – 22.99% (most cards) |
| Interest calculation | Daily, from day of withdrawal | After grace period (if balance paid in full) |
| Minimum payment | Interest + principal portion | 1–3% of balance or $10 |
| Rewards/perks | None | Cash back, points, travel rewards |
| Access to cash | Direct withdrawal from LOC | Cash advance (very high fees/rates) |
| Grace period | None — interest starts immediately | 21+ days if previous balance paid in full |
| Best for | Larger purchases, planned borrowing | Daily transactions, building credit, rewards |
Key difference: A line of credit charges interest from the day you borrow, with no grace period. A credit card offers a grace period (typically 21 days) on purchases if you pay your balance in full each month. However, carrying a balance on a credit card costs far more than a line of credit due to much higher interest rates.
Managing a Line of Credit Responsibly
A line of credit offers significant flexibility, but that flexibility can lead to problems if not managed carefully. Here are strategies to keep your borrowing under control:
1. Set a Personal Spending Limit
Just because your credit limit is $30,000 does not mean you should use it all. Set a personal ceiling well below your limit to maintain a buffer for emergencies.
2. Make Payments Over the Minimum
Minimum payments on a line of credit often cover only the interest, meaning your balance never decreases. Always pay more than the minimum to reduce your principal.
3. Treat Borrowed Funds Like a Loan
Create a mental (or written) repayment plan for any amount you borrow. Decide in advance how many months you will take to repay it and stick to the schedule.
4. Monitor Your Interest Rate
Since LOC rates are variable, keep an eye on prime rate changes. If rates rise significantly, consider paying down your balance more aggressively or switching to a fixed-rate personal loan.
5. Avoid Using Your LOC for Daily Expenses
A line of credit should supplement your finances for planned purposes, not serve as an extension of your income. If you are relying on your LOC for daily living costs, it may be time to review your budget.
6. Monitor Your Credit Utilization
Using a high percentage of your available credit (high utilization) can lower your credit score. Try to keep utilization below 35% of your limit.
Line of Credit vs Personal Loan: Which Should You Choose?
| Situation | Best Option |
|---|---|
| One-time expense with clear timeline | Personal loan — fixed payments, predictable cost |
| Ongoing or unpredictable expenses | Line of credit — borrow as needed, pay interest only on what you use |
| You want to lock in a fixed rate | Personal loan — fixed rate protects against rate increases |
| You want maximum flexibility | Line of credit — revolving access, no commitment on unused funds |
| Debt consolidation | Personal loan — structured repayment prevents re-borrowing |
If you are carrying balances on multiple products, a debt payoff calculator can help you create a structured repayment plan.