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Loans come in different forms. Some are designed to finance specific items — such as cars and homes — while others offer more flexibility when it comes to what you can do with the funds. The one you choose depends on what you need the money for, your credit profile, and the types of valuable assets you have. 

Let’s go into more detail about what each type of loan is and which one may be best suited for you. 

Unsecured vs. Secured Loan: What Are They?

The differences between unsecured and secured loans come down to whether or not collateral is involved, which can affect other loan factors. 

Unsecured Loan 

Unsecured loans are not backed by an asset of value, so you won’t risk losing collateral if you default. The most common type of unsecured loan is a personal loan. Approval is generally based on your credit and overall finances. Most banks, credit unions and online lenders offer these loans. 

Do note, unsecured loans are generally more expensive than secured loans since it does not have any collateral. 

Secured Loan

Secured loans are collateralized by a valuable asset, such as a car or house. This means, if you default on the loan, you risk losing your asset of value. However, this security reduces the risk for the lender, which means you may be able to get approved more easily for a secured loan at a lower interest rate

You may also qualify for larger loan amounts due to the security it provides the lender. 

Unsecured vs. Secured Loan: Main Differences 

Qualification criteria, interest rates, and loan amounts differ between unsecured and secured.

Unsecured Loan

  • Loan Amounts – With unsecured loans, lenders will generally offer lower loan amounts compared to secured loans due to higher risk. Many lenders offer up to 50,000 in unsecured loans. 
  • Interest Rates – Lenders will charge higher rates compared to secured loans due to increased risk with no collateral. Rates often range heavily between 5% to 47% APR. 
  • Types Of Loans – Personal loans, payday loans, credit cards, and student loans are common types of unsecured loans. 

Secured Loan

  • Loan Amount – Depending on the type of secured loan, the loan amount can range heavily from a few thousand to several hundred thousand dollars. For example, you could get a secured car loan for $10,000 and a $700,000 mortgage for a house. 
  • Interest Rates – Interest rates for secured loans are usually much lower compared to unsecured loans due to reduced risk with collateral. Rates can go as low as 1.5%. 
  • Loan Types – Car loans, mortgages, home equity loans and lines of credit are common types of secured loans. You can also get secured personal loans by offering the lender an asset of value as collateral. Similarly, there are secured credit cards, where you must provide a deposit as collateral.

Where Can You Get Secured Or Unsecured Loans?

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Types Of Loans: Unsecured vs. Secured Loan

There are several types of loans available under both the unsecured and secured loan umbrellas. The one you choose depends on your specific needs and what you’re financing.

Types Of Unsecured Loans 

Here are some of the most common types of unsecured loans in Canada that are offered by Big Banks, credit unions and alternative lenders. 

Personal loans

These loans can range from $500 up to $50,000 and come with interest rates anywhere from 5% to 47%. The loan amount and rate you qualify for are based on your credit score, income, debt level and overall financial health. Your lender will provide you with a lump sum of money which you’ll repay via installments over a specific loan term, usually between 6 to 60 months.

Payday Loans

These short-term loans are made for very small amounts, usually no more than $1,500. Payday loans are extremely expensive and can be difficult to pay back because of their sky-high interest rates and short loan terms. While these loans are expensive, they are very easy to qualify for, especially if you have bad credit. No credit checks are required, you usually just need to provide proof of income. 

Credit Cards

A credit card is another form of unsecured credit. It allows you to make purchases on credit. You can spend as much as you want up to your designated credit limit. You’ll regain access to your credit as you pay back the balance. 

If you pay the full amount of the borrowed money by the due date, you won’t have to worry about interest. But if you carry a balance forward, you’ll be charged interest on the outstanding amount. 

There are many different types of credit cards in Canada, many of which are designed for different purposes. For example, some credit cards are designed for travel, students, everyday spending, low interest, etc. Depending on the card you want, the requirements to qualify will vary. Generally, cards with more benefits have higher income and credit score requirements. ]

Types Of Secured Loans

Here are some of the most common types of secured loans in Canada that are offered by Big Banks, credit unions and alternative lenders.

Mortgages

A home loan finances the purchase of a house. With a mortgage, the home you’re financing acts as collateral. Your lender will provide you with a lump sum of money that you will repay over a specific loan term, plus interest. 

Mortgage rates are often lower than unsecured loans because your home’s value reduces the lender’s risk. Since your home collateralizes the mortgage, you risk losing this asset if you default on your loan payments.  

Car loans

Like mortgages, auto loans are used to finance a large asset. In this case, the asset is the vehicle you’re buying. Again, you’ll be given a sum of money that must be repaid according to the terms of the loan contract. Generally, terms range between 36 months to 96 months and the average car loan interest rate hovers around 5%-6%. 

Since your car serves as collateral, you must keep up with payments to avoid defaulting and having your car repossessed by the lender. 

Home Equity Loans

If you own a home and have a certain amount of equity accumulated, you may be able to borrow against this equity through a home equity loan or home equity line of credit. Your home collateralizes the loan, which makes it easier to get approved at an affordable rate. 

Depending on your situation, you may be able to borrow up to 60%-80% of your home’s appraised value minus what you owe on your current balance. 

Secured Personal loans

While personal loans are more often unsecured, you can choose to collateralize your loan by securing it with an asset of value. Backing your personal loan with collateral can help lower your interest rate and make it easier for you to qualify for a higher loan amount. 

Secured Credit Cards

If you can’t get approved for a traditional credit card due to poor credit or low income, a secured credit card is easier to get approved for. You simply need to be able to provide the minimum security deposit (which also acts as your credit limit) to qualify. In this way, you’re technically spending money you already have. However, the lender will be reporting your payments to the credit bureau which can help you build credit. 

Unsecured vs. Secured Loan Benefits

There are different reasons why you may want to apply for an unsecured loan or secured loan, as both loan options come with several advantages. 

Secured Loan Benefits 

  • Easier to qualify for. Adding a valuable asset as collateral to your loan will minimize the lender’s risk. In turn, you may be able to qualify for a secured loan without as high a credit score as may be required for an unsecured loan. 
  • Larger loan amounts. The collateral used to back your loan will also allow you to get approved for a higher loan amount thanks to the lower risk for the lender. 
  • Lower interest rates. Again, the reduced risk for the lender as a result of the presence of collateral may help you qualify for a lower interest rate, making your loan more affordable. 

Unsecured Loan Benefits

  • More flexibility. You usually take out a secured loan to finance a specific purchase, such as a car or house. But with an unsecured loan, like a personal loan, you have more flexibility to use the borrowed funds for a variety of other purposes. 
  • Low risk. If you default on your loan payments, you won’t risk losing anything of value, since the loan is not collateralized by a major asset. 

Unsecured vs. Secured Loan Drawbacks

Along with the benefits of unsecured and secured loans comes a few disadvantages to each that you should consider before choosing one.

Secured Loan Drawbacks

  • Risk of losing collateral. Secured loans require collateral. This helps reduce the lender’s risk and helps you get approved for a higher loan amount and a lower rate. But if you fail to keep up with your payments, your lender may repossess the asset and sell it to recoup their losses. 
  • Less flexibility. Secured loans like mortgages and car loans finance a specific purchase. If you want to use the money for other purposes, you’ll need to look at other loan types, such as unsecured personal loans. 

Unsecured Loan Drawbacks

  • Harder to qualify for. Without collateral to support your loan, you’ll need to have very good credit and a solid income to get approved for an unsecured loan.  
  • More expensive. Unsecured loans tend to come with higher interest rates to offset the lender’s risk. 

What Happens If You Default On An Unsecured Loan vs. A Secured Loan?

The consequences for failing to make your payments can vary a bit between secured and unsecured loans. However, there are a few similar repercussions:

  • Late penalty charges – Whether you have a secured or unsecured loan, lenders typically charge late fees on overdue payments. You’re already paying interest on your loan, and adding late penalty charges will make your loan more expensive. 
  • Hurt credit score – Regardless of your loan type, late payments on your credit report may hurt your credit scores. Your payment history is used to calculate your credit score. So if your payments are late, your credit scores may suffer. This can make it more difficult for you to get approved for loan products in the future. 
  • Debt sold to a collection agency – This consequence generally pertains to unsecured loans. With no collateral to recoup payment, lenders may sell your debt to a collection agency whose sole purpose is to hound you for repayment.
  • Garnished wages – If you default on your unsecured loan, your lender or debt collection agency could take steps in court to have your wages garnished to cover the missed payments. If the court order is granted, the money you owe will be deducted from your paycheques until the outstanding balance is paid back in full. 
  • Loss of collateral. This is a unique consequence of secured loans. If you default on a loan secured by collateral, you risk losing the asset. With mortgages, your lender can foreclose your home. With car lenders, they may repossess your vehicle to recoup payment.

Should You Get An Unsecured Loan Or A Secured Loan?

Your decision on which loan type to apply for depends on your particular situation and needs. 

An unsecured loan might be best if you:

  • Have excellent credit
  • Need flexibility with the borrowed funds
  • Don’t want to put collateral at risk

A secured loan is better suited for you if you: 

  • Need a larger loan amount
  • Have a lower credit score
  • Are buying a house or car
  • Want a lower interest rate

Final Thoughts

The main difference between unsecured vs. secured loans is whether or not collateral is involved. While secured loans are backed by a valuable asset and are typical for financing a car or home, an unsecured loan requires no collateral and can be used for anything. Depending on what you want to finance, each option will provide benefits and risks. So be sure to do your research before applying. 

Unsecured vs. Secured Loan FAQs

Can I get a lower rate with a high credit score?

You’ll have a much easier time securing a lower interest rate if you have excellent credit, regardless of the loan type you apply for.

Are interest rates higher on secured or unsecured loans?

Interest rates are usually higher on unsecured loans because there is no collateral backing the loan. The lender is therefore at greater risk and will offset this risk with a higher rate. 

Where can I get a secured personal loan?

Secured personal loans are available from a variety of lenders, including banks, credit unions, and alternative lenders. If you have poor credit, alternative lenders are the best way to go. 
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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