Secured loans in Canada

What is a secured loan?

When you take out a secured personal loan, you provide collateral to secure the loan. For example, you could offer your car or the equity in your home as collateral.

This allows you to access a lower interest rate than an unsecured loan because as far as the lender is concerned, it reduces the risk to them if you default on the loan. If that happens, the lender can repossess the asset to cover the cost of any repayments you’ve failed to make. And that’s the main downside of a secured loan – putting your assets at risk.

The good news is that you can use the loan funds for just about any purpose, from paying for car repairs to renovating your home, and you’ll typically have anywhere between 3 months and 10 years to pay back the loan.

Where can you get a secured loan?

There are several options to choose from when you’re looking for a secured loan.

• Banks. You can get a secured bank personal loan from the Big Five as well as a number of other major financial institutions. Banks offer competitive interest rates but have strict loan eligibility criteria, so you’ll struggle to qualify if you have bad credit.
• Credit unions.Credit unions tend to offer slightly smaller loan amounts than the big banks, but they’re also generally a little more flexible in terms of eligibility. If your credit history is a little less than perfect, you may still be able to qualify for a loan if you’re a long-term member.
• Online lenders. Online lenders have more lenient lending criteria than traditional lenders. Many online lenders accept borrowers with fair or bad credit, but you’ll need to be willing to accept higher interest rates.
• Online brokers. If you need help finding a loan that suits your financial situation, you could also consider using an online broker. Brokers work with a network of lenders to provide access to a range of loan options, including loans for bad-credit borrowers.

1. Home equity loan

Suited for: Fair to good credit

• How it works: A home equity loan lets you borrow against the equity you’ve built up in your home. Let’s say your home is worth $800,000 and you still owe $300,000 on your mortgage – this means you’ve built up $500,000 of equity in your home that you can use as collateral. Lenders typically allow you to borrow up to 80% of your home equity to take out a fixed-term secured loan or a line of credit.
• APRs: 5.4% – 30%
• Loan amounts: Starting at $5000
• Loan terms: 1 – 25 years

2. Car title loan

Suited for: Fair to bad credit

• How it works: With a car title loan, your loan is secured to the title of a vehicle you own. Once your vehicle has been appraised, you’ll typically be allowed to borrow 25–50% of your car’s value. These loans offer fast access to your funds and are also suitable for borrowers with bad credit.
• APRs: 9% – 49%
• Loan amounts: $1,000 – $50,000
• Loan terms: 3 - 60 months

3. Secured line of credit

Suited for: Good credit

• How it works: With a line of credit, you can use your home or investments as collateral to gain access to a predetermined amount of credit as and when you need it. You’re charged interest on the money you withdraw rather than the total balance, and you’ll generally get a lower interest rate than on a credit card.
• APRs: 5.4% – 46.96%
• Loan amounts: $500 – $50,000
• Loan terms: Open

4. Credit builder loan

Suited for: Fair to bad credit

• How it works:Credit builder loans help you improve your credit score while setting money aside at the same time. Designed for people with bad credit or no credit history at all, they don’t allow you to access any money when you first take out a loan. Instead, you make regular loan payments that are reported to the credit bureaus, and once the loan term ends, the lender transfers a lump sum of cash into your account.
• APRs: 9.5% – 20%
• Loan amounts: $1,250 – $10,000
• Loan terms: 6 – 24 months

5. Pawn shop loan

Suited for: Fair to bad credit

• How it works:Pawn shop loans offer fast access to cash when you provide a valuable item, such as a piece of jewellery or a laptop, as collateral. However, these are short-term loans and interest rates can be high, so it’s worth considering a range of options before deciding if this is the right type of loan for you.
• APRs: 10–200+%
• Loan amounts: Approximately 25–60% of item’s value
• Loan terms: Typically 30–90 days

6. Life insurance loan

Suited for: Good credit

• How it works: If you have a permanent life insurance policy, some lenders will allow you to borrow against the cash value you’ve built up in your policy. However, it’s worth noting that if you default on the loan, this may reduce the amount your policy pays to your beneficiaries in the event of your death.
• APRs: Varies
• Loan amounts: Up to 90% of cash value of policy
• Loan terms: Varies

How to apply for a secured loan

If you’re ready to apply for a secured loan, here’s what you need to do.

1. Understand your situation. The first thing you need to do is sit down and work out how much you need to borrow and how much you can afford to pay. You can also check your credit score to get a better idea of which lenders you should consider, plus look at ways to improve your credit score and increase your borrowing options.
2. Compare lenders and loans. Make sure you only ever deal with legitimate lenders and check whether you meet credit score and income requirements. When comparing individual loans, remember to consider the APR, loan terms, additional fees, eligible collateral and whether you have the flexibility to repay the loan early.
3. Submit an application. Once you’ve found the right loan, apply by providing your name, contact details and proof of collateral. You’ll need to provide proof of income (such as your driver’s licence) and proof of ownership of the item you’re using as collateral. For example, if you’re applying for a home equity loan, you’ll need to provide a copy of the property’s title deed, mortgage statements and a copy of your latest property tax bill. If you’re applying for a car title loan, you must provide a copy of the title, issued in your name.
4. Get your collateral appraised. With home equity loans, your lender will likely run a title search to check for existing debt on the property. They will also conduct an appraisal to verify the current market value of your home. If you’re applying for a car title loan, lenders may ask for your car’s VIN and a vehicle inspection certificate to make sure your vehicle is in drivable condition. Earmark extra time for the appraisal for home equity loans – it can take anywhere from 3 days to 3 weeks for a lender to process and approve your application, including time for an appraisal.
5. Review your loan offer. If the lender is satisfied, they will approve your loan application. Make sure to review all the details of the loan contract before you sign.

Frequently asked questions

• What happens when you default on a secured loan?

  The lender has the right to repossess the asset you provided as collateral. The default will also be recorded on your credit file and will negatively impact your credit score.

• How long does a secured loan take?

  Terms for secured loans range anywhere from 3 months to 10 years.

• Are secured loans a good idea?

  Secured loans are a good way to get a lower interest rate and to increase your chances of approval since you are reducing the risk for the lender. However, make sure you can afford the repayments because if you default, the lender can repossess your asset.

• What can I buy with a secured loan?

  This depends on the type of secured loan. With some secured loans, you borrow money to make a specific purchase that will act as collateral (e.g. car loans or mortgages). With other types of secured loans, you can use the money for any legitimate purpose.

• Are secured loans hard to get?

  It depends on the secured loan you're applying for. Some secured loans come with few eligibility requirements, such as a pawn shop loan or car title loan. As long as you're willing to provide collateral to secure your loan and you can show lenders you have the ability to make repayments, you're in the clear. Others are harder to get approved for, such as a home equity loan. In this case, lenders take stock of both your credit score and your total debt to determine your ability to repay.