Line of Credit vs Term Loan Calculator: Compare True Cost & APR

Compare a revolving line of credit and a fixed term loan side by side on effective APR and total interest.

A term loan and a line of credit quote APRs that aren't actually comparable on their face — a term loan's rate applies to a shrinking balance over a fixed schedule, while a line of credit's rate applies only to whatever you've actually drawn, whenever you've drawn it. This simulator puts both over the identical time horizon so the two numbers it produces are genuinely a like-for-like comparison, not two different math problems presented side by side.

How to compare a line of credit with a term loan

In the term loan panel, enter the loan amount, the annual interest rate and the term in years; the term also sets the horizon both options are compared over.
In the line of credit panel, enter the credit limit and its annual rate.
Enter the percentage of the limit you expect to keep drawn, or leave it blank to test the worst case of a fully drawn line.
Read the side-by-side boxes — each option's effective APR and total interest — and the sentence underneath that names the cheaper option and the dollar difference.
Change the draw percentage to find the level where the answer flips, then use Print / Save as PDF to keep the summary.

Line of credit vs term loan at a glance

How you get the money: a term loan pays the full amount once at the start; a line of credit lets you draw what you need, when you need it, up to the limit.
What interest is charged on: a term loan charges interest on the whole outstanding balance from day one; a line charges only on the amount currently drawn.
How you repay: a term loan has fixed monthly payments that clear principal and interest by the end of the term; a line is revolving, so repaid amounts become available to draw again.
Rate type: term loans are frequently fixed-rate, while business lines of credit are often variable and tied to a benchmark rate, which this simulator does not model.
Typical use: a term loan suits a one-off purchase with a known cost; a line suits uneven cash needs where the amount and timing change month to month.

When to choose a line of credit or a term loan

Pick a line of credit for seasonal inventory, gaps between paying suppliers and getting paid by customers, or a cash buffer you hope not to use — situations where the drawn balance stays well below the limit most of the time.
Pick a term loan for a defined purchase such as equipment, a vehicle, a fit-out or an acquisition, where you need the whole amount at once and a fixed repayment schedule helps you budget.
Many businesses hold both: a term loan for the long-lived asset and a line for working capital, so a slow-paying customer never forces an expensive short-term fix.
If you would keep a line almost fully drawn for years, it is behaving like a term loan that never gets paid down, and the comparison below shows that usually costs more.

Worked example: a $100,000 line drawn at 30% vs 100%

Take the simulator's starting values: a $100,000 term loan at 8% over five years against a $100,000 line of credit, also at 8%. The term loan's payment is about $2,028 a month, and because the balance falls with every payment, total interest over the five years is about $21,658.

Leave the draw field blank and the line is treated as fully drawn for all 60 months. The simulator holds the drawn balance flat rather than paying it down, so interest is $100,000 × 8% ÷ 12 × 60 = $40,000 and the term loan is cheaper by about $18,342. Enter 30% instead and only $30,000 accrues interest: $12,000 in total, now about $9,658 cheaper than the term loan.

The answer flips at roughly 54% of the limit. At 54% the line costs $21,600 and still wins; at 55% it costs $22,000 and the term loan comes out ahead. Run your own amounts and rates to find your break point, and be honest about how much of the line you would really keep drawn.

The term loan side is standard mortgage math, repurposed

A business term loan amortizes exactly like a mortgage with no down payment: fixed monthly payments split between interest and principal, calculated from the amount borrowed, the rate, and the term. This simulator reuses that same amortization engine directly rather than re-implementing the formula, so the two tools' underlying arithmetic for a fixed loan is identical.

A standard fixed-rate amortized loan with no added fees has an effective APR equal to its quoted nominal rate — there's no origination fee or points modeling here that would push the two numbers apart.

The line of credit only charges for what you draw

Interest on the line accrues only against the portion of the credit limit you actually draw, held at that level for the same number of months as the term loan comparison — never against the full undrawn limit. If you leave the typical-draw field blank, the simulator assumes the line is fully drawn and flags that assumption explicitly in the result, rather than silently guessing a lower number that would flatter the line of credit.

The APR shown for the line is the effective rate on the amount actually drawn, which is simply your quoted rate, since a flat non-amortizing draw has no compounding effect to change it. Drawing less does not lower that percentage; it lowers the dollars of interest, which is why the total-interest boxes are the real like-for-like figures. If you want the line's cost as a share of the whole limit, divide its total interest by the limit and by the number of years: $12,000 ÷ $100,000 ÷ 5 is 2.4% a year in the 30% example.

What gets rejected before a comparison runs

Loan amount, credit limit, or either interest rate entered as zero or negative.
A term-loan length of zero years or less.
A typical-draw percentage entered outside the 0 to 100 range.

Reading 'cheaper' correctly

The comparison names a cheaper option based on total interest paid over the shared horizon at the draw assumption you gave it — change the draw percentage and the answer can flip, because a line of credit drawn at 30% of its limit and one drawn at 100% are functionally different products.

Real lenders also layer on origination fees, draw fees, unused-line fees, and covenant terms that this simulator does not model at all. A lender's actual term sheet, not this comparison, is what determines the real cost of either product — treat this as a starting framework for the conversation, not the final number.

Questions people ask about Business Line of Credit vs. Term Loan APR Simulator

Do I pay interest on the full credit limit?: Not in this model: interest is charged only on the drawn portion, so a $100,000 line with $30,000 drawn accrues interest on $30,000. Some real lenders do add an unused-line or commitment fee on the undrawn part, which this simulator does not include, so check your offer for one.
How is a line of credit different from a term loan?: A term loan hands you a lump sum and a fixed repayment schedule that pays it off by the end of the term. A line of credit is a revolving limit you draw from and repay as you go, paying interest only on what is outstanding, which makes it cheaper when little is drawn and costlier when it stays maxed out.
Can I have a line of credit and a term loan at the same time?: Yes, and many businesses do, using the term loan for a long-lived asset and the line for day-to-day cash flow. Lenders look at your total debt and repayment capacity when approving the second facility, so holding both depends on your credit and cash flow rather than any rule against it.
Why is the line of credit cheaper even though both APRs show the same rate?: Because the APR shown for the line applies only to the portion you draw, while the term loan's rate applies to the full borrowed amount from day one. The percentages can match while the total interest differs widely; if you assume the line is fully drawn, its advantage disappears and the term loan usually wins.
What happens if I don't fill in a typical draw percentage?: The simulator defaults to treating the line as fully drawn for the whole comparison period and marks that as an assumption in the result, rather than guessing a lower, more flattering draw level on its own. Fill in a realistic draw percentage for a comparison that reflects how you'd actually use the line.
Does this account for origination fees or draw fees?: No. It compares pure interest cost — the amortized rate on a term loan against the drawn-balance rate on a line of credit — and does not model origination fees, draw fees, unused-line fees, or covenants that real lenders commonly attach to either product.
Can I use this result to negotiate with a lender?: You can use it as a starting framework for the conversation, but the actual numbers a lender offers you — fees, covenants, prepayment terms — will differ from this simplified comparison. Confirm any real financing decision against the lender's actual term sheet and, for a material amount, a financial advisor.

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Content reviewed 2026-09-27.