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.
Pros and cons of secured loans
- Lower rates. Because you secure your loan with an asset, you can get a lower rate and save on interest repayments.
- Higher loan amounts. You can typically borrow more money with a secured loan since it’s guaranteed by an asset.
- Increased chance of approval. Providing a suitable asset as security can reduce the level of risk to the lender and improve your chances of getting approved.
- Bad credit options available. There are secured loans available for borrowers with poor credit scores.
- You risk losing your asset. If you default on the loan, the lender can repossess the asset you offered as security.
- 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.
- Fees apply. Your lender may charge appraisal or inspection fees when they measure the value of your asset. Other fees to watch out for include prepayment penalties (which may apply to home equity loans), origination fees, NSF fees and late payment fees.
What can you use as collateral?
- Home equity. A home equity loan allows you to use the equity you have built up in your home as collateral for a loan.
- Car title. With an auto title loan, the loan is secured to the title of your car.
- Investments. You can use your investment portfolio as collateral for a loan, provided you own what a lender deems to be eligible investments. These can include securities guaranteed by the Canadian government, NHA mortgage-backed securities and corporate bonds.
- Life insurance policy. Some lenders allow you to borrow against the cash value of your permanent life insurance policy.
- Valuables. Some lenders accept valuables like jewellery, art, electronics and musical instruments as collateral. Check with your lender to find out which items it accepts for a secured loan.
Secured loans are also used to buy a specific asset
Secured personal loans allow you to borrow money for any purpose. But there are also two types of secured loans you can use when you need to buy a specific asset:
- Car loans. With a secured car loan, the vehicle you want to buy is used as security for the loan. You can spread out repayments over a term of up to 8 years, and in many cases, you’ll need to make a down payment of 10–20% of the vehicle’s purchase price.
- Mortgages. When you take out a mortgage, the home you’re buying is used as security for the loan. This means that if you default on the mortgage, the lender can take ownership of the home.
What are the eligibility requirements for secured personal loans?
Eligibility requirements vary between lenders. However, in addition to providing a suitable form of collateral, you will generally also need to meet the following criteria:
- Be 18 years of age or older (or the age of majority in your province or territory).
- Be a Canadian citizen or permanent resident.
- Meet minimum credit score requirements (note: some lenders accept borrowers with bad credit).
- Be in regular employment and have a steady source of income.
- Have a valid Canadian bank account.
How do I get a secured loan with bad credit?
If you have bad credit, you typically won’t be able to access a secured loan from a traditional lender like a bank or credit union. However, there are online lenders that specialize in loans for bad credit borrowers.
Rather than focusing on your credit score, these lenders will look at factors such as your income and your level of existing debt to determine whether you can afford to repay a loan.
Risks of bad credit secured loans
There are a couple of risks to watch out for when applying for a bad credit secured loan:
- High rates. 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.
- Losing your collateral. You’re putting an asset on the line to qualify for your loan, so tread carefully. There is a risk of losing the roof over your head, your means of transportation or a valuable possession.
Secured vs unsecured personal loans
Below are the differences between a secured loan and an unsecured loan for the average borrower with a decent credit score.
|Secured loan||Unsecured loan|
|Requirements||Collateral appraisal required, more paperwork||No collateral required, less paperwork|
Types of secured loans in Canada
This list focuses on secured loans that let you borrow money for any purpose. Check out the following six options.
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: 6.99% – 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: 6.99% – 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
What is APR and why is it important?
APR stands for annual percentage rate. It’s a key figure that provides an accurate reflection of the real cost of a loan.
The APR is different from the interest rate that applies to a loan. It takes into account the interest rate as well as the fees you must pay to get the loan, such as origination fees, title search fees and appraisal fees.
The APR is expressed as a percentage and shows you the true cost of borrowing. Under Canadian law, a lender must tell you the APR before you sign a loan agreement. So when you’re comparing loans and you want to work out which one is the least expensive, look at the APR.
Just remember that there are other factors that can impact the cost of a loan – for example, a longer loan term means you’ll pay more interest – and fees like prepayment penalties, late payment fees and NSF fees are not included in the APR.
How to apply for a secured loan
If you’re ready to apply for a secured loan, here’s what you need to do.
- 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.
- 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.
- 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.
- 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.
- 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.
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