Whether you’re looking to consolidate debt, cover an unexpected expense, or fund a big purchase, a loan can be a helpful tool. But if your credit isn’t perfect, or you want access to lower rates, you may find that lenders are more willing to work with you if you provide collateral.
This type of borrowing is known as a secured loan, and it can make the difference between approval and rejection.
In this article, we’ll explain what secured loans are, the types available in Canada, the benefits and risks, and how they compare to unsecured loans.
Key Points
- A secured loan is a type of loan that requires collateral, which the lender can seize and sell if the borrower fails to repay.
- A cash-secured loan is a type of loan where you borrow money using your own savings or a cash deposit as collateral, helping build credit while minimizing lender risk.
- Examples of secured loans include personal loans, home equity loans, HELOCs, lines of credit, and car title loans.
What Is A Secured Loan?
A secured loan is a loan that requires you to pledge an asset — such as your home, car, savings account, or investments — as collateral. The lender takes a legal interest in the asset, which reduces the level of financial risk they assume when lending to you. If you fail to repay the loan, the lender is legally entitled to seize or sell the asset to recover their money.
Because lenders face less risk in comparison to a conventional unsecured loan, secured loans can often come with lower interest rates, higher borrowing limits, and more flexible terms, especially if your credit history is strong.
What Is A Cash-Secured Loan?
A cash-secured loan (sometimes called a “savings secured loan”) is a type of secured loan that’s backed by money you already have in a savings account, GIC, or other deposit account.
For example, let’s say you have $5,000 sitting in a savings account. With a cash-secured loan, you could pledge it as collateral for a $5,000 loan. You continue earning interest on your savings, and as you repay the loan, you’ll also build or rebuild your credit history.
This makes cash secured loans especially popular for borrowers with bad or limited credit who want a way to improve their credit score without taking out an expensive loan.
Types Of Secured Loans
There are several types of secured loans available through various lenders in Canada, each with different uses and collateral requirements.
Secured Personal Loans
A secured personal loan is a general-purpose loan, usually backed by collateral such as savings, investments, or property. Approval odds are higher compared with unsecured loans, especially for those with bad credit.
What Can You Use To Secure A Personal Loan?
The following assets may be used to back a personal loan:
- Real estate/home equity: Utilizing the value of your property can unlock larger loan amounts.
- Vehicle: If you own a car outright or have sufficient equity, it can serve as collateral.
- Savings accounts or GICs: These are common with cash-secured loans.
- Investments: Some lenders allow stocks or mutual funds to be pledged.
- Personal valuables: While less commonly used, high-value assets (e.g., jewelry, collectibles) may be a feasible option with alternative or speciality lenders.
Home Equity Loans/HELOCs
Home equity loans and home equity lines of credit (HELOC) are secured against the equity in your home. Equity is the difference between your home’s market value and the remaining mortgage balance.
- Home Equity Loan: Provides a lump sum with a fixed repayment schedule.
- HELOC: Functions like a revolving credit line, letting you borrow and repay as needed.
Learn more: HELOC vs. Home Equity Loan For Homeowners
Car Title Loans
A car title loan is secured by your vehicle. The lender essentially places a lien on your car title until the loan has been fully repaid. These loans are often marketed to borrowers with low or poor credit scores, but they still typically carry high interest rates, and of course, the risk of losing your car if you default.
Secured Lines Of Credit
Similar to a credit card, a secured line of credit is revolving credit backed by collateral, such as a home or a savings account. With this kind of loan, you only pay interest on what you actually use, making it flexible. That said, variable rates can cause payments to fluctuate, so be sure to consider your options carefully if taking this route.
Learn more: Loans With Collateral
How To Apply For A Secured Loan
Applying for a secured loan is usually more involved than applying for an unsecured one, since the lender needs to verify the value and ownership of your collateral. Here’s what to expect:
Decide What Asset To Use As Collateral
Think carefully about which asset you’re willing to commit. A home, car, savings account, or investments are all common options. If you’re unsure how to proceed, it might be worth speaking with a financial professional or CPA.
Review Your Financial Profile
Even though collateral reduces the lender’s risk, your income, debt-to-income (DTI) ratio, and credit history will still be considered. A stable income and a manageable debt-to-income ratio will improve your odds of approval.
Compare Lenders And Products
Banks, credit unions, and online lenders all offer secured loans, but terms will vary widely between them.
Pay close attention to details like interest rates, repayment schedules, penalties, and fees. Some lenders specialize in cash-secured loans or auto title loans, while others may only offer home equity products, so make sure the lender you choose is a good fit.
Submit Your Application
Be prepared to provide documents proving your identity, employment, income, and ownership of the collateral.
In some cases — such as with home equity loans — a professional appraisal may be required to determine the asset’s value.
Wait For Approval And Disbursement
Approval times can range from same-day to several weeks, depending on the lender and collateral type. Once the lender confirms your collateral, funds will be deposited directly into your account.
Learn more: How To Apply For A Loan
Secured Vs. Unsecured Loans: What’s The Difference?
When you’re deciding between a secured and unsecured loan, consider the following key differences.
| Feature | Secured Loan | Unsecured Loan |
| Collateral | Required (e.g., home, car, savings) | Not required |
| Interest Rates | Usually lower | Usually higher |
| Approval Odds | Easier with bad credit | Harder with bad credit |
| Loan Amounts | Often higher | Usually capped lower |
| Risk to Borrower | Loss of collateral if you default | Credit score damage |
Use Of Collateral
A secured loan requires you to pledge an asset, while an unsecured loan does not. This means secured loans carry less risk for the lender, and in return, you may benefit from lower rates, higher borrowing limits, and easier approval, even with poor credit.
By contrast, unsecured loans rely solely on your credit history, income, and debt-to-income ratio. That makes them harder to obtain if your credit score is low, but they’re also less risky for you because you don’t stand to lose a physical asset if you default. The trade-off is higher interest rates, smaller loan amounts, and potentially tighter eligibility requirements.
Loan Size
The difference is also clear when it comes to loan size. A bank may hesitate to give you a $50,000 unsecured personal loan unless you have excellent credit. But if you put up your home as collateral, you could well be approved for that amount, or even more, through a secured loan like a HELOC.
Risk
Finally, consider the risk to you as a borrower. With a secured loan, default could mean losing your car, house, or savings. With an unsecured loan, the consequences fall on your credit score and your ability to borrow in the future.
While both outcomes are serious, the impact could be very different depending on your financial situation.
Learn more: Unsecured vs. Secured Loan: What’s The Difference?
Benefits Of A Secured Loan
Secured loans come with the following perks:
Easier Approval
One of the biggest advantages of a secured loan is that collateral reduces the lender’s risk, making approval more accessible for borrowers with poor or limited credit histories. Even if you’ve been turned down for an unsecured loan, pledging an asset like your home, car, or savings account can significantly improve your chances of qualifying.
Lower Interest Rates
Since the lender has collateral to fall back on, they don’t need to charge as high a rate to offset potential losses. This usually means secured loans come with lower interest rates compared to unsecured loans, which can save you thousands over the life of a large loan, like a mortgage, HELOC, or auto loan.
Higher Borrowing Limits
Lenders are often more comfortable offering larger amounts when the loan is secured. For example, a home equity loan or secured line of credit may provide access to tens of thousands of dollars, depending on your available equity. This makes secured loans a practical option for major expenses, such as home renovations, education, or consolidating multiple debts.
Credit Building Opportunity
Successfully managing a secured loan can help repair or build your credit history. Each on-time payment is reported to the credit bureaus, which strengthens your score over time. For borrowers rebuilding after financial challenges, a secured loan can act as both a financing solution and a stepping stone to better credit.
Learn more: 5 Reasons Why Borrowers Choose A Secured Personal Loan
Risks to Consider
Be sure to weigh the potential drawbacks of a secured loan before applying:
Risk Of Losing Your Asset
The biggest risk of a secured loan is the potential loss of your collateral. If you default on payments, the lender has the legal right to repossess or sell the asset—whether that’s your car, home, or savings account—to recover their losses.
Overborrowing
Because secured loans often provide access to larger amounts of money, it can be tempting to take on more debt than you can realistically manage. Borrowing beyond your repayment capacity can quickly create financial strain and increase the risk of losing your asset.
Hidden Fees
Some lenders include less obvious costs that can catch borrowers off guard, such as origination fees, late payment charges, or prepayment penalties. These extra expenses can erode the savings you gain from lower interest rates, making it essential to read the fine print.
Variable Rates
Not all secured loans have fixed interest rates. For products like secured lines of credit, rates may fluctuate with the market. This means your payments could increase unexpectedly over time, potentially straining your budget if you’re not prepared.
Final Word
Secured loans can be a smart option if you need lower rates, higher limits, or have trouble qualifying for an unsecured loan. But they also come with a clear trade-off: the risk of losing your collateral. Before you apply, carefully compare offers, understand the terms, and make sure you can handle the payments.
