Overdraft and a line of credit are not the same kind of product
An overdraft is a permission attached to a deposit account. It lets the balance go below zero, either because the provider approved that in advance or because the provider decides to cover a payment when it arrives. What it costs, how long you may stay in a negative position, and whether the provider can demand immediate repayment are all set out in the account agreement that governs the account.
A line of credit is a separate credit agreement. The provider approves an amount, you draw against it as needed, and you pay interest on the portion you have drawn. Revolving lines of credit restore your available room as you repay, which is why they are commonly used for ongoing expenses or to consolidate balances that carry a higher cost. A line of credit can be unsecured, or it can be secured against an asset such as a home or an investment account.
The difference between line of credit and overdraft is therefore structural. One is a clause inside an everyday banking arrangement. The other is a standalone contract with its own approved limit, its own pricing, and its own repayment expectations. That single difference drives almost everything else, including which one ends up costing you less.
Overdraft vs line of credit: side-by-side comparison
The table below compares the two on the features that decide cost and flexibility. Where a figure is not shown, it is because the actual number is set by the provider's agreement and your own circumstances — there is no national default that applies to everyone.
| Feature | Overdraft | Line of credit |
|---|---|---|
| What it is | A negative-balance feature attached to a deposit account | A separate credit product with its own agreement |
| How you get it | Approved in advance, or applied when a payment arrives, depending on the provider and the account | You apply, the provider assesses you, and a limit is set before you can draw |
| Where the funds sit | Inside the account you already use | In a distinct credit account the provider opens |
| Security | Generally unsecured; the account agreement governs | Can be unsecured, or secured against property or investments |
| Cost structure | A periodic fee, an interest charge, or both, as set out in the account agreement | Interest on the amount drawn, at a rate set in the credit agreement |
| Repayment | Often expected quickly; some arrangements require the balance to return to positive on a set schedule | A minimum payment is usually due each period and the rest can revolve |
| Credit reporting | May be visible through the account it is attached to, and missed amounts can be reported | Typically appears as a tradeline with its own limit and balance |
| Typical use | Covering very short gaps between money going out and money coming in | Repeated or larger draws you intend to repay over a longer period |
What decides which one costs you less
There is no single rate that answers this question for every borrower, and any page that hands you one without seeing your agreement is guessing. Much of the line of credit vs overdraft debate really comes down to timing and structure. What actually decides the cost is a short list of factors.
- How long you carry the balance. Overdraft arrangements are built around short gaps. The longer a negative balance sits, the more the structure works against you compared with a product designed to be repaid over time.
- Whether you are charged a fee, interest, or both. Some account agreements charge a set amount for using the facility; others charge interest on the negative balance; some do both. A charge that repeats can outweigh a lower interest rate on a small balance.
- Whether the credit is secured. Secured borrowing is generally priced differently from unsecured borrowing because the provider's risk is different. That is a structural difference, not a prediction about your rate.
- Whether a repayment schedule is enforced. A product that lets a balance sit indefinitely is not automatically cheaper, even if the rate looks lower — the total cost depends on how long you take to clear it.
- What the limit is and how it was set. An approved limit is not the same as an appropriate limit. Borrowing to the maximum on either facility increases the cost of carrying it.
- What happens if you miss a payment. The consequences written into the agreement — returned payment charges, reporting to a credit bureau, or the provider withdrawing the facility — matter as much as the headline cost.
One hard boundary applies to both. The Criminal Code criminal rate of interest is 35% per year (s. 347). No credit agreement in Canada can be priced above that ceiling. That tells you what is unlawful. It does not tell you what is competitive, and it does not tell you which product fits your situation.
The lowest rates are only available to the most qualified applicants.
When you weigh the two, compare the total cost of borrowing over the period you expect to actually need the money, not just the stated rate. The Financial Consumer Agency of Canada publishes plain-language guidance on personal loans and on comparing the cost of borrowing, which is a sensible starting point before you read any specific agreement.
Where a line of credit sits against other borrowing
Lines of credit occupy the middle of the market. At one end is a secured line of credit tied to a home. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending against the property usually capped at 80%. Those lenders also generally work to a total debt service ratio ceiling of about 44%, and qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25%, under OSFI Guideline B-20. Canadian fixed-rate mortgages are compounded semi-annually by law.
At the other end sit payday loans. Where a province operates a licensed payday lending regime, the federal Payday Lending Regulations (SOR/2024-114) cap the cost of borrowing at $14 per $100 advanced. Some provinces set a cap lower than $14 per $100, and the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. A payday loan is generally up to $1,500 for a term of 62 days or less. These products compete for the same short-term cash gap an overdraft covers, but they are priced on a completely different scale.
Benchmarks are worth understanding too. The Bank of Canada publishes the policy interest rate, the prime rate, conventional mortgage rates and Government of Canada benchmark bond yields. These are benchmarks, not offers, and no lender is obliged to lend at them. If a line of credit is priced off prime, it is priced off a benchmark that moves, not off a fixed promise.
Credit reports, defaults and the record that follows
Canada has two national credit reporting bureaus: Equifax Canada and TransUnion Canada. Both an overdrawn account and a line of credit can appear on your file, but not in the same shape. A line of credit typically appears as a tradeline with its own limit, balance and payment history. Overdraft use is usually visible through the deposit account it is attached to. Missed or unpaid amounts on either can be reported.
The longer-term consequences follow the same rules regardless of which product caused the problem. A consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first. A first bankruptcy stays on a credit report for 6 years after discharge. Only a licensed insolvency trustee can administer a consumer proposal or bankruptcy. If you are considering either, the decision is significant enough that it belongs with a regulated professional who can review your full financial picture, not with a general guide.
How to choose, step by step
- Estimate how long you need the money. Days, weeks and months lead to different answers. A facility designed for a short gap is a poor fit for a balance you intend to carry for a year.
- Read the agreement that applies to each option. For an overdraft, that is your account agreement. For a line of credit, it is the credit agreement and its disclosure of cost.
- Work out the total cost over your expected timeline. Add every charge the agreement permits, including per-use charges and any periodic fee.
- Ask what gets reported. Ask each provider whether the facility is reported to Equifax Canada or TransUnion Canada, and in what form.
- Check whether a secured product is appropriate. Securing credit against your home or investments changes the risk you are taking, not just the price.
- Look at whether you can clear the balance. If there is no realistic path to repayment, adding a new facility usually makes the situation harder rather than easier.
- Get help early if you are already struggling. Non-profit credit counselling, and for insolvency questions a licensed insolvency trustee, exist for exactly this situation.
Regulation, complaints and where to take a problem
Lending in Canada is licensed provincially, so the regulator and the rules differ depending on who you are dealing with and where you live. Federally regulated financial institutions' consumer complaints go to the Financial Consumer Agency of Canada; provinces license and supervise most other lenders. That means a good first question about any product is who regulates the provider, because that determines where a complaint can go if the agreement is not honoured.
If a federally regulated institution will not resolve a problem, the Financial Consumer Agency of Canada sets out the complaint process, including the steps a provider is expected to follow before a matter escalates.
loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions, and it cannot approve or decline anyone. It is a matching and comparison service. Any rate, limit or term you are offered comes from a licensed provider and depends on that provider's own assessment of your circumstances, which is why the right answer for you may differ from the general picture described here.