How do line of credit payments work in Canada?
**Line of credit payments in Canada have no fixed structure.** Unlike mortgages or car loans with blended principal-and-interest payments on a set schedule, a LOC only requires you to pay the interest accrued each month. Any principal repayment is voluntary, which is both the flexibility and the danger of this product.
Each month, your lender calculates interest on your outstanding balance using daily simple interest: Daily Interest = Balance x (Annual Rate / 365). The sum of daily charges over the billing cycle is your minimum payment. On a $25,000 LOC at 7.2%, that works out to roughly $150 per month.
If you pay more than the minimum, the excess reduces your principal balance. Since interest accrues daily on the current balance, even a mid-month payment reduces your interest cost for the remaining days. This makes LOCs uniquely responsive to extra payments compared to fixed-rate term loans.
Most Canadian lenders (TD, RBC, Scotiabank, CIBC, BMO) set the minimum payment at interest-only, though some require interest plus 1% to 2% of principal. Check your LOC agreement for your specific terms. Regardless, relying on the minimum payment alone means your debt never decreases.
How to choose the right payoff timeline
**The best payoff timeline balances two factors: monthly affordability and total interest cost.** A shorter timeline means higher monthly payments but significantly less interest. A longer timeline is easier on your cash flow but costs more overall.
For a $25,000 LOC at 7.2%, here is how different timelines compare: paying it off in 1 year requires $2,165/month with $984 in total interest. In 2 years, the payment drops to $1,122/month with $1,933 in interest. In 3 years, it is $774/month with $2,876 in interest. In 5 years, $496/month with $4,748 in interest.
A practical rule of thumb: choose the shortest timeline where the monthly payment is no more than 15% of your take-home pay. If that leaves you with a 5-year plan, that is fine. It is still vastly better than interest-only payments, which cost you $1,800 per year in interest on that same $25,000 balance with zero debt reduction.
If your income is variable (freelancers, commission-based roles), target a conservative timeline but make lump-sum payments when you have extra cash. Since LOCs have no prepayment penalties, every bonus or tax refund can go directly to principal.
| Payoff Period | Monthly Payment | Total Interest | Total Paid |
|---|---|---|---|
| 1 year | $2,165 | $984 | $25,984 |
| 2 years | $1,122 | $1,933 | $26,933 |
| 3 years | $774 | $2,876 | $27,876 |
| 5 years | $496 | $4,748 | $29,748 |
| 10 years | $292 | $10,071 | $35,071 |
| Interest-only | $150 | Unlimited | Unlimited |
The impact of extra payments on a line of credit
**Extra payments on a line of credit are the single most effective way to reduce your total borrowing cost.** Because LOC interest accrues daily on the outstanding balance, every dollar of principal reduction immediately lowers your daily interest charge.
Consider a $30,000 LOC at 8% with a target 3-year payoff. The required monthly payment is $940. Adding $200 extra per month ($1,140 total) pays off the LOC in about 29 months instead of 36 and saves $752 in interest. Adding $500 extra ($1,440 total) pays it off in about 23 months and saves $1,493.
Unlike mortgages where prepayment may be restricted or penalized, Canadian lines of credit allow unlimited payments at any time with no penalty. This means you can make payments whenever you have extra cash, not just on your statement date.
A powerful strategy is to align extra LOC payments with your pay schedule. If you are paid biweekly, make a payment every payday rather than once per month. This keeps your average daily balance lower and reduces interest accumulation between payments.
LOC payments vs term loan payments
**The fundamental difference between LOC and term loan payments is structure.** A term loan (personal loan, car loan, mortgage) has a fixed repayment schedule where each payment includes both principal and interest. A LOC only requires interest, leaving principal repayment up to you.
Term loans offer predictability: you know exactly how much you will pay each month and when you will be debt-free. LOCs offer flexibility: you can pay more or less depending on your cash flow, draw additional funds as needed, and there is no fixed end date.
However, this flexibility is a double-edged sword. Research from FCAC shows that many Canadian LOC borrowers make interest-only payments for years, effectively renting money with no path to becoming debt-free. The average Canadian household carries $36,000 in non-mortgage debt, with LOCs being a significant contributor.
If you find yourself unable to consistently pay more than the interest-only minimum on your LOC, consider converting it to a fixed-rate personal loan. While the rate may be slightly higher, the structured payments force principal repayment and guarantee a debt-free date.
Managing variable rate risk on your LOC
**Because LOC rates are variable, your required payment to stay on track changes with every Bank of Canada rate decision.** A rate increase means more of your payment goes to interest and less to principal, potentially extending your payoff timeline.
For example, if you are paying $800/month on a $25,000 LOC at 7.2% (targeting a 36-month payoff), a 1% rate increase to 8.2% means your monthly interest jumps from $150 to $171. Your principal reduction per month drops from $650 to $629, adding roughly 2 months to your payoff timeline.
To protect against rate risk, build a buffer into your target payment. Instead of paying exactly the calculated amount for your target timeline, add 10% to 15%. This buffer absorbs rate increases without extending your payoff date.
During the 2022-2023 rate hiking cycle, the Bank of Canada raised rates from 0.25% to 5.00%. LOC borrowers who had been making payments based on 3% rates suddenly faced payments that barely covered interest at 7%. As of April 2026, the overnight rate sits at 2.25% (prime 4.45%), which is moderate by historical standards. Plan for rates to fluctuate by 1% to 2% in either direction over your payoff period.
How to use this calculator: a worked example
**Let us walk through a scenario that shows the power of this calculator.** Suppose you have a $40,000 unsecured LOC at 8.45% (prime + 4%), and you want to create a realistic payoff plan.
Step 1: Enter $40,000 as the balance. Step 2: Set the interest rate to 8.45%. Step 3: Set the target payoff period to 36 months (3 years). The calculator shows you need to pay $1,263 per month. Your total interest over 3 years will be $5,478, and total paid will be $45,478.
Step 4: Now look at the timeline comparison chart. Paying off in 1 year requires $3,493/month but only costs $1,915 in interest. Paying off in 5 years drops the payment to $820/month but the interest balloons to $9,189. The stacked bar chart makes this tradeoff visually obvious.
Step 5: Try adding $200 in extra payments. With $200 extra per month on top of the 3-year payment ($1,463 total), you pay off the LOC in about 30 months and save roughly $1,000 in interest. The balance decline chart shows the faster debt trajectory.
Step 6: Share your results. Click the share button to copy a URL with your exact inputs. Send it to your partner or financial advisor to discuss the plan together.
Frequently asked questions
How much should I pay on my line of credit each month?
At a minimum, pay the interest-only amount to avoid penalties. To actually pay off your LOC, you need to pay significantly more. A good target is to choose a 2- to 3-year payoff timeline and pay the calculated amount. For a $25,000 LOC at 7.2%, that means $1,122/month (2 years) or $774/month (3 years). Use this calculator to find the payment that fits your budget.
What is the minimum payment on a line of credit in Canada?
Most Canadian lenders (TD, RBC, Scotiabank, CIBC, BMO) set the minimum payment at interest-only: your outstanding balance multiplied by the daily rate, summed over the billing cycle. Some lenders require interest plus 1% to 2% of the principal. Check your LOC agreement for the exact terms. Making only the minimum means your balance never decreases.
How long does it take to pay off a $20,000 line of credit?
It depends entirely on your payment amount and interest rate. At 7.2% interest with $500/month payments, a $20,000 LOC takes about 46 months (just under 4 years) to pay off and costs $2,777 in total interest. At $300/month, it takes 86 months (over 7 years) with $5,692 in interest. With interest-only payments of $120/month, it never gets paid off.
Is it better to pay off a line of credit or save money?
In most cases, paying off your LOC first is better. If your LOC rate is 7.2%, every dollar of debt repayment earns an effective 7.2% return (tax-free). High-interest savings accounts offer 3% to 4%. The exception is if you have no emergency fund at all. Keep 1 to 2 months of expenses in savings for emergencies, then direct all extra cash to LOC repayment.
Can I make a lump sum payment on my line of credit?
Yes. Canadian lines of credit allow unlimited lump sum payments at any time with no prepayment penalty. Unlike mortgages with annual prepayment limits, you can pay off your entire LOC balance in a single payment if you want. Lump sums from tax refunds, bonuses, or inheritance go directly to principal and reduce your daily interest immediately.
How does the interest rate affect my LOC payment?
Higher rates require higher payments for the same payoff timeline. For a $25,000 LOC paid off over 3 years: at 5% you pay $749/month ($1,959 total interest), at 7.2% you pay $774/month ($2,876 total interest), and at 10% you pay $807/month ($4,040 total interest). A 5% difference in rate adds $2,081 to your total interest cost over 3 years.
Should I convert my line of credit to a personal loan?
Converting makes sense if you struggle to make consistent principal payments. A personal loan forces structured repayment with a fixed end date. However, you lose the flexibility to re-borrow. If your LOC rate is lower than available personal loan rates, keep the LOC but commit to a payment plan using this calculator. If the personal loan rate is competitive, the forced discipline may be worth it.
What happens if I miss a line of credit payment?
Missing a payment triggers late fees (typically $25 to $50), and the missed interest gets added to your principal balance. This means you start paying interest on interest. Repeated missed payments can result in your lender freezing your LOC (preventing further draws), demanding full repayment, and reporting the delinquency to credit bureaus, which damages your credit score.
Does paying off my LOC faster improve my credit score?
Paying down your LOC balance improves your credit utilization ratio, which is a major factor in your credit score. Lower utilization (the percentage of your available credit that you are using) signals responsible borrowing. Going from 80% utilization to 30% can improve your score by 50 to 100 points. The payoff itself also shows lenders you can manage revolving debt responsibly.
How do biweekly payments affect my LOC payoff?
Making payments every two weeks instead of monthly results in 26 half-payments per year (equivalent to 13 monthly payments instead of 12). This extra payment per year accelerates your payoff. On a $25,000 LOC at 7.2%, biweekly payments of $387 (half of $774 monthly) pay it off about 2 months earlier and save roughly $200 in interest compared to monthly payments.