Secured loans are loans that require collateral such as property or assets to secure the cash you borrow. These loans often come with lower interest rates than unsecured loans. That said, you risk losing whatever collateral you put up to secure your loan if you default on the loan. Find out more about how secured loans work and learn what type of loan is right for your financial needs.
A secured loan is a loan that’s guaranteed against an asset you own or plan to buy with the money you borrow. Loan amounts vary depending on what type of asset you put up as collateral, with many providers capping maximum loan amounts at $50,000. Terms for secured loans usually range from a couple of months to several years.
There are many types of collateral you can put up to secure your loan. These include your vehicle, the equity in your home, the money in your savings or investment accounts and valuable items you own such as jewellery or artwork.
How is a secured loan different from an unsecured loan?
There are a couple of key differences between unsecured and secured loans.
Secured loans. Secured loans require you to use an item of value to secure the money you want to borrow. If you default on your payments, this asset can be repossessed to pay the outstanding balance of your loan. This means you’ll lose your collateral but your credit score won’t suffer as much if you can’t make your repayments. You’ll also get lower interest rates with secured loans in Canada.
Unsecured loans. Unsecured loans don’t require you to put up collateral to secure your loan. Instead, lenders rely heavily on your credit score to determine your eligibility. These loans also impact your credit score significantly if you default on your payments or fail to pay back your loan on time. They also typically come with higher rates than secured loans, especially if you don’t have a good to excellent credit score.
Is a secured loan the right option for me?
It’s important to determine whether any type of financial product is right for you before you apply. When it comes to secured loans in Canada, here are some questions to ask yourself:
Can I manage the loan repayments? If you’re unable to repay your secured loan, your lender can repossess the asset you put up to secure your payments. This can put you in a real lurch – especially if the asset in question is your home, vehicle or savings account.
Do I have an asset to guarantee as collateral? Lenders will require that you already have an asset to secure your loan. You may also be able to buy one with the money you borrow (for example, a car). The asset you put up will need to be worth more than the balance of your loan in most cases.
Do I meet the requirements set by the lender? Lenders may have requirements for what assets you can put up. For instance, if you’re using a vehicle as security, it may need to be under a certain age or mileage for you to use it as collateral. If you’re using a savings or investment account, you could need a minimum balance to qualify.
Pros and cons of secured loans
Benefits
Lower rate. Secured loans are less risky for lenders since they allow lenders to fall back on the collateral you put up to recoup their costs if you default on your payments. Lower risk means that secured loans usually come with lower interest rates.
Higher loan amounts. You can typically borrow more money with a secured loan since it’s guaranteed by an asset. Secured loans also tend to come with longer terms so that your monthly payments are smaller.
Flexible. Secured loans often let you spend the money you borrow on anything you want. The only time this doesn’t apply is if you’re borrowing money to purchase an asset that will be used as collateral (for example, if you purchase a car to secure your loan).
Better chance of approval. Offering an asset to secure a personal loan can help you get approved for a loan even if you have bad credit. This is because the loan will be deemed less risky for a lender to take on when there is an asset attached to it.
Drawbacks
Potential loss of assets. When you take out a secured loan, you have to put up an asset or some form of collateral to secure your payments. While this can give you lower interest rates, you also risk losing your asset if you default on your payments.
Loan amount tied to your asset’s value. When you attach your asset to a secured loan, the value of that asset has to be appraised to see how much you can borrow. You’ll typically only be able to borrow a lump sum equal to or less than the appraised value of your asset.
Loan amounts. Many lenders cap their secured loans at between $35,000 and $50,000. Look for a lender that will allow you to borrow the amount you want.
Interest rates. Compare providers to make sure you lock in competitive interest rates. You may also want to check the annual percentage rate (APR) of your secured loan to get a better idea of how much it will cost.
Loan terms. Loan terms can range from 1 to 10 years. You’ll want to look for a term that gives you manageable payments without charging you too much interest.
Fees. Find out if you’ll need to pay fees upfront to qualify for a loan. These include application and origination fees as well as any ongoing annual or monthly fees.
Eligible assets. Make sure your assets are eligible to be used as collateral for a secured loan in Canada. You may also want to have them appraised to see how much you could be eligible to borrow.
Repayment flexibility. Find out if you can prepay your loan without penalty before you sign on with a provider. This will make sure you can put more down on your loan if you end up with a surplus of cash.
What assets can be used as collateral?
You may be able to use the following assets to secure your personal loan:
New car. If you’re buying a new car or if you have a car that is less than a few years old, you can generally use it as a guarantee for a secured loan. You may also be able to secure a loan with a motorcycle, boat or RV.
Used car. Lenders will also let you purchase a used car with a secured loan. The vehicle will generally need to be less than seven years old, although some lenders may accept older cars.
Equity in your home. If you own a mortgaged property, you may be able to secure your loan against the equity you have in your home. You can usually use up to 80% of that equity to lock in a secured loan.
Valuable assets. Some lenders are more flexible with the assets they let you use. If you own expensive jewellery, fine art, precious metals, luxury cars or even certain antiques, you may be able to secure these assets against your loan.
Savings account. Offered by banks and credit unions, you can sometimes use your savings account as security in case you default on the loan. The amount you have in your savings account is usually the amount you’ll be eligible to borrow.
If you think a secured loan is the right choice for you, it may be time to start comparing lenders. Once you find a loan that meets your needs, you can apply online using the steps below:
Application process
Visit the lender’s website and fill in the online application. This usually takes less than 10 minutes if you have all of the necessary information on hand.
Input personal information such as your full name, date of birth, address, phone number and email.
Supply financial details such as your bank name and transit number as well as your personal account number.
Confirm proof of employment or income by providing pay stubs or bank account statements from the last 90 days.
Loan eligibility requirements
To qualify for a secured loan, you may need to meet the following eligibility requirements:
You must be at least 18 years old or the age of majority in your province or territory.
You’ll need to be a Canadian citizen or a permanent resident with a valid Canadian address and two valid pieces of identification.
You must be able to prove that you can pay off your loan by showing pay stubs, bank account statements and other relevant financial documents.
You’ll need to have your asset appraised and signed over to your lender in the event that you default on your payments.
You’ll usually need to have a bank account to apply for a loan online.
What to consider before applying
Before applying for any type of secured loan, it’s important to establish whether you can afford the repayments. If you default on the loan, the asset you’ve used to guarantee your loan can be taken by your lender and sold to cover its losses.
If you fail to repay the loan or make late repayments, you also risk damaging your credit score.
Comparing lenders to find the most competitive options in terms of rates and fees will help you find the right loan for your budget and needs, so consider whether you’ve done the proper research before submitting your loan application.
Bottom line
Taking out a secured loan can save you money in the long run. This is because you’ll often get lower interest rates on your loan since it’s less risky for lenders. You may also be able to qualify for higher loan amounts and a longer term if you find the right lender. Just be aware that you may lose the assets or collateral you use to secure your loan if you fail to make your payment on time.
Frequently asked questions about secured loans
You get lower interest rates with a secured loan because it’s less risky for a lender to take on. This is because the lender can sell your assets to cover its losses if you default on your payments. Lenders have to take on more risk with unsecured loans since they get nothing back if you decide not to pay off your loan.
Your lender will be able to repossess and sell your asset to recoup its losses. Additionally, your credit score will likely take a negative hit.
A car loan is used specifically to purchase a vehicle. The loan is still secured, but you can only use the loan to purchase the vehicle that will be used as security for the loan. With a regular secured loan, you already own the asset in question. This means you can use the money you borrow to buy whatever you want.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, along with an Associate's Degree in Science from Camosun College. Much of Claire's coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. She has also worked extensively in the field of "Blended Finance" with the Canadian government. In her spare time, Claire loves rock climbing, travelling and drinking inordinate amounts of coffee.
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