Secured loans are loans that require collateral. Because your asset is backing your loan, this type of financing often comes with lower interest rates compared to unsecured loans. The downside? You risk losing your asset if you default on your loan.
What is a secured loan?
A secured loan is a loan that’s guaranteed against an asset you own or plan to buy with the money you borrow. There are many types of collateral you can put up to secure your loan. These include your vehicle, your home, the money in your savings or investment accounts and valuable items you own such as jewelry or artwork.
Loan amounts for secured loans vary depending on what type of asset you put up as collateral. For example, a loan secured by your home equity will usually have a larger amount than a loan secured by your car. Terms for secured loans usually range from 3 months to 10 years.
Secured personal loans in Canada tend to have lower rates but not always. If the secured loan is designed for borrowers with bad credit, like a vehicle title loan or pawn loan, the interest rate is a lot higher.
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Types of secured loans in Canada
With some secured loans, you borrow money to make a specific purchase that will act as collateral. This is the case with car loans and mortgages. With other secured loans, you use an asset you already own to borrow money for any legitimate purpose. You may use home equity, your car that’s already paid in full or other valuable possessions as collateral. Below is a closer look at this type of secured loan.
| Type of secured loan | Collateral required | Annual percentage rate (APR) | Loan amount | Loan term |
|---|---|---|---|---|
| Home equity loan | Home equity | 2-29% | $5,000-$500,000 *With a home equity loan, you can typically borrow up to 80% of the value of your home, minus your mortgage. | Up to 120 months |
| Credit builder loan | Borrowers repay the loan amount before they get the money deposited into their bank account. | 9.5-20% | $1,250-$10,000 | 6 to 24 months |
| Loans secured by savings or investments | Existing savings or investments | Varies, depending on your loan amount and loan security provided. | Varies, depending on the loan security provided. | Up to 5 years |
| Vehicle title loan | Car title | Over 300% | 25-50% of the value of the car. | 3 to 60 months |
| Pawn shop loan | Valuable possessions, such as jewellery, art or a laptop. | Over 300% | $150-$10,000. You’ll get a loan for a percentage of your item’s value, which is generally between 20% and 60% of the resale value. | 30 days to 12 months |
Secured loans for good credit
1. Home equity loans
If you own your home and have built up some equity in it, you can use that equity as a guarantee on your next loan. When you apply, you will need to provide details of your mortgage, your personal financial position and the reason you’re taking out the loan. If approved, you will be given a loan based on how much equity you hold and how much the lender thinks you can afford to repay. If you default on the loan, the lender will recoup its losses by taking ownership of that equity.
If you have fair or bad credit, you might still qualify for this loan from some lenders, but your interest rate won’t be as competitive.
2. Investment- or savings-secured loans
With investment- or savings-secured loans, borrowers take out a loan using money in their savings account or investment funds as collateral. Because you’re offering to secure your loan with cash upfront, lenders will typically approve these loans faster compared to unsecured loans.
Secured loans for bad credit
1. Credit builder loans
Credit builder loans are designed to help you put money aside while rebuilding your credit score by reporting all of your on-time payments to the credit bureaus. Unlike traditional loans, you won’t be able to access your funds until you’ve paid your credit builder loan off in full. Once that happens, you’ll get a lump sum of cash that you can save or spend on whatever you want.
2. Vehicle title loans
Car title loans are loans taken out against the title of your car. These loans give you access to credit, which can typically be as much as 50% of the value of your car. Lenders that provide auto title loans usually require that you own your vehicle outright. If you don’t make regular payments on your auto title loan, your vehicle can be repossessed and sold.
3. Pawn shop loans
While you can sell your items for cash at a pawn shop, you can also secure a loan using a valuable possession, such as a laptop or a piece of jewelry. The pawn shop will hold onto it as collateral until you repay your loan and the interest that accrued. It’s like securing a loan with a prized possession, and as long as you repay your loan on time, you’ll get it back.
What is APR and why is it important?
When searching for secured loans in Canada, you might see lenders using the terms “interest rate” and/or “APR”, which stands for “annual percentage rate”. This can cause confusion because the two are different.
- Interest rate: This is the amount the lender charges you for borrowing money from them. It is a percentage of the amount you borrow, and it is usually an annual interest rate.
- APR: This is the annual cost of a loan that includes the annual interest rate plus other fees you need to pay. Looking at the APR is useful because it gives you a broader view of the cost of the loan. Sometimes, a loan doesn’t have other fees. In this case, the APR is the same as the annual interest rate.
APR example: Pawn loan
Let’s use a pawn loan as an example. Pawn shops typically do not say “APR”. Instead, they say “fees” or “interest rate”. For a $200 loan over 30 days, a pawn shop might say the cost is $30 for every $100 borrowed (or 5% interest plus 25% storage fee). Expressed as an APR, this is 365%, which is an extremely high cost.
Is a secured loan right 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.
How to compare secured personal loans
- Loan amounts. Loan amounts vary by lender. For example, a lender of home equity loans can offer larger amounts than a lender of car title loans.
- Interest rates. Compare providers to make sure you lock in competitive interest rates. You may also want to check the APR of your secured loan to get a better idea of how much it will cost.
- Loan terms. Loan terms can range from 3 months to 10 years or more. 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 extra fees. For example, the origination fee is a processing fee that is deducted from the loan amount.
- 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.
How to apply for secured personal loans in Canada
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
Secured 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.
Can I get a secured personal loan with bad credit?
You can apply for secured personal loans from online lenders that specialize in bad credit. Before applying for a secured personal loan, consider the following:
- Cost. Before you shoulder more debt, ask yourself if you can manage the responsibility of debt repayments. Secured loans for bad credit have high interest rates, so take a close look at your budget to make sure you have the funds to stay on top of your loan.
- Assets on the line. Whether you’ve opted for a home equity loan, pawn title loan, title loan or secured personal loan, you’re putting an asset on the line to qualify for your loan. With this in mind, tread carefully before agreeing to a secured loan. There is a risk of losing the roof over your head, your means of transportation, your pot of savings or a valuable possession.
- Eligibility requirements. Lenders of bad credit loans often list their eligibility requirements. Usually, there is a minimum income and credit score you need to meet. Check that you meet the requirements before applying to avoid getting denied.
Can I afford the repayments of a secured personal loan?
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What assets can be used as collateral?
You may be able to use the following assets for a secured 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 7 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.
- Investment or savings accounts. Offered by financial institutions, you can sometimes use your investments or savings as security in case you default on the loan. The amount you have in your account is usually the amount you’ll be eligible to borrow.
25+ types of collateral you can use to secure a loan
Pros and cons of secured loans
Benefits
- Lower rate in general. 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.
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
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