Why would a line of credit ever cost more than its APR suggests?

Because the APR is only charged on the balance you draw — but fixed costs like an annual maintenance fee don't shrink just because you're using less of the line. If you have a $100,000 line but only carry a $10,000 average balance, a $500 annual fee alone adds 5 percentage points to your effective rate on that balance, on top of the stated APR.

What's a 'draw fee' and is it common?

Some lenders charge a small percentage fee each time you draw funds from the line, separate from ongoing interest. Not every lender charges one, but where it exists, it behaves like the annual fee — a fixed-ish cost that hits harder on a smaller average balance.

Should I just not open a line of credit if I won't use much of it?

Not necessarily — a line of credit's value isn't only in what it costs, it's also in having flexible access to capital for uneven cash flow (a slow month, an unexpected expense, a seasonal gap) without applying for a new loan each time. The right question isn't 'is this line expensive' in isolation, it's whether the flexibility is worth what it actually costs given your real usage pattern — which is exactly what the effective-rate calculation tells you.

How is this different from a business credit card?

Mechanically similar — both are revolving credit you draw against as needed. Lines of credit typically offer larger limits and lower rates than credit cards, but credit cards are faster to obtain and often come with rewards that can offset some cost. For any meaningful balance carried over time, a line of credit's lower rate usually wins even after fees.

Debt & financing

The Real Cost of a Business Line of Credit

A line of credit's advertised APR only tells you what you pay on the balance you draw. Annual fees and draw fees don't scale down with light usage — so a lightly-used line can cost far more than its rate suggests.

5 min read · Published May 2026

Key Takeaways

A line of credit's APR only applies to the balance you actually draw — but annual and draw fees are often fixed regardless of how much you use.
The less of the line you use on average, the higher your effective rate climbs, since fixed fees get spread over a smaller balance.
Utilization — how much of your approved limit you actually carry — is the number that determines whether a line of credit is cheap or expensive in practice.
A line of credit and a term loan aren't interchangeable — a line makes sense for fluctuating short-term needs, a term loan for a known amount you'll pay down on a fixed schedule.
Compare the effective rate on your actual usage, not the advertised APR, before assuming a line of credit is the cheaper option.

The APR is only part of the price

A line of credit is quoted with an interest rate, same as any loan — but unlike a term loan, you’re not paying interest on the full approved amount. You’re paying it only on what you actually draw. That sounds like it should make a line of credit cheaper than a term loan for the same rate. Often it does. But fixed fees change the picture once usage is light.

Fixed fees don’t care how much you use

Most lines of credit carry at least one fee that doesn’t scale with usage — an annual or maintenance fee charged whether you draw $5,000 or $95,000 of a $100,000 line. Some also charge a small fee on each draw. Both behave the same way mathematically: as a share of your actual average balance, they get more expensive the less of the line you use.

Example

Credit limit$100,000

Average balance drawn$20,000

Interest rate (APR)9.0%

Annual fee$500

Draw fee1.0% of balance

Effective rate on actual usage12.5%

The quoted 9% APR is real — it's what's charged on the drawn balance. But once the $500 annual fee and 1% draw fee are counted against that same $20,000 balance, the effective cost is 12.5%, not 9%.

Utilization is the number that matters

The same line at the same fees, carrying $80,000 average instead of $20,000, has an effective rate much closer to the stated APR — the fixed fees are spread over four times the balance. Low utilization is what turns a competitive-looking rate into an expensive one in practice.

When a line of credit is still the right call

None of this means a line of credit is a bad product — it means the advertised rate isn’t the number to compare against a term loan or another financing option. A line of credit’s real value is flexibility: access to capital for uneven cash flow without reapplying every time a gap shows up. If that flexibility is worth the effective rate at your actual usage pattern, it’s doing its job. If the line mostly sits unused with the meter still running on the annual fee, that’s worth reconsidering.

Find your real effective rate

Enter your limit, average balance, and fees to see the true cost of your line.

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Frequently asked

Questions owners actually ask

Why would a line of credit ever cost more than its APR suggests?: Because the APR is only charged on the balance you draw — but fixed costs like an annual maintenance fee don't shrink just because you're using less of the line. If you have a $100,000 line but only carry a $10,000 average balance, a $500 annual fee alone adds 5 percentage points to your effective rate on that balance, on top of the stated APR.
What's a 'draw fee' and is it common?: Some lenders charge a small percentage fee each time you draw funds from the line, separate from ongoing interest. Not every lender charges one, but where it exists, it behaves like the annual fee — a fixed-ish cost that hits harder on a smaller average balance.
Should I just not open a line of credit if I won't use much of it?: Not necessarily — a line of credit's value isn't only in what it costs, it's also in having flexible access to capital for uneven cash flow (a slow month, an unexpected expense, a seasonal gap) without applying for a new loan each time. The right question isn't 'is this line expensive' in isolation, it's whether the flexibility is worth what it actually costs given your real usage pattern — which is exactly what the effective-rate calculation tells you.
How is this different from a business credit card?: Mechanically similar — both are revolving credit you draw against as needed. Lines of credit typically offer larger limits and lower rates than credit cards, but credit cards are faster to obtain and often come with rewards that can offset some cost. For any meaningful balance carried over time, a line of credit's lower rate usually wins even after fees.

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Educational content only. This article is for informational purposes and does not constitute tax, legal, or financial advice. Every situation is different — consult a qualified professional before acting on anything here.