Line of credit vs. term loan: which actually costs less?

It's the most common question we get, and the honest answer is: it depends entirely on how you'd use the money. A term loan can have a lower headline rate than a line of credit and still cost you far more — or far less. The variable that decides it is how long you actually hold the borrowed money.

A term loan charges from day one

With a term loan, you receive a lump sum and start paying interest on the entire balance immediately, for the full term — whether the money is sitting in your account or out doing work. If you need $100,000 for a one-time purchase you'll pay off steadily over three years, that structure is efficient and the rate is usually low.

A line charges only for what you use, while you use it

A line of credit flips that. You're approved for a limit, but interest accrues only on the balance you've drawn, only for the days you hold it. Draw $40,000 for three weeks to bridge an invoice, repay it, and you've paid three weeks of interest on $40,000 — not three years on $100,000.

The rule of thumb

For a single, known, long-lived expense, a term loan's lower rate usually wins. For recurring, short-lived, or unpredictable needs — covering a gap, catching a seasonal buy, holding capital on standby — a line almost always costs less in practice, because you're not paying for money you're not using.

The mistake we see most often is owners taking a large term loan "to be safe," then paying interest for years on capital that mostly sits idle. If that sounds familiar, a line is probably the cheaper tool.