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Published August 29, 2023
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Secured vs. Unsecured Loan: How to Choose

Before you sign on the dotted line, consider whether a secured or unsecured loan might be the best fit for your situation.

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Secured and unsecured loans are both options for Canadians seeking financing, but these lending instruments are not created equal. Whether you choose a secured or unsecured loan will depend on your plans for using the funds and whether you have an asset to guarantee the loan.

Comparing secured and unsecured loans

With a secured loan, the lender agrees to provide the borrower with a set amount of money for a period of time, after which it will be repaid with interest and fees. The loan is secured with an asset, known as collateral — anything from a car to a house or other property type, depending on the type of loan. If the borrower defaults on the loan, the lender reserves the right to seize the asset to cover the debt.

With an unsecured loan, the borrower is also borrowing a lump sum of money and agreeing to pay it back over time, plus fees and interest. However, with this type of loan, the borrower is not required to pledge any assets to secure the loan. The lender instead considers factors like the borrower’s credit score, income and debt-to-income ratio to determine whether to lend them the funds.

Secured loan vs. unsecured loans: common features

 Secured loanUnsecured loan
Criteria to qualifyAsset to guarantee against the loan (e.g., car, home).Proof of income, bank account, permanent address, credit check.
Credit checkYes.Yes.
Where to findBanks, alternative/online lenders.Banks, credit unions, alternative/online lenders (payday loan company, pawn shop, private lender).
CostsMay charge administration fees, appraisal fees and/or title search fees.None.

Secured vs. unsecured loans: differences

Interest rates: The interest rates associated with secured and unsecured loans vary by loan provider, but generally, secured loans come with lower rates than their unsecured counterparts because they are guaranteed by collateral. Essentially, the asset put forward by the borrower means the lender is taking on less risk, because if the borrower defaults on their repayment, the lender could seize the asset to help pay off the debt.

Typical uses: Secured and unsecured loans can be ideally suited for different circumstances. As unsecured loans are often approved more quickly, they can be used for small home renovation projects, as well as emergencies or other life expenses such as car repairs.

Secured loans can come with larger limits and longer terms, so they may typically be used to access funds for large home renovations or post-secondary education costs, or as consolidation loans for borrowers paying down higher-interest debt, such as credit card balances. 

How to choose between a secured and unsecured loan

To start, the ability to choose between a secured or unsecured loan will depend on whether you have an asset to guarantee against the loan. If you do have an asset but still want to weigh both options, here are a few other points to consider:

  • Secured loans typically offer lower interest rates than their unsecured counterparts, as the lender is taking on less risk because of the collateral.
  • Because lenders place more emphasis on the asset and less on the borrower’s credit situation, secured loans also can be more appropriate for borrowers who have a lower credit score.
  • Secured loans can also be a good fit for borrowers who are self-employed or earn fluctuating income, as the lender is securing the loan with an asset rather than placing emphasis on regular income.

Also think about:

  • When you need access to the funds: Secured loans may take longer to process than their unsecured counterparts, because the lender has to verify the asset and its value.
  • How much you need to borrow: With a secured loan, borrowers may be able to access more funds. This is because the loan is backed by collateral, which allows the lender to assume less risk. Loan terms may also be longer than those offered by lenders on unsecured loans.

Frequently asked questions about secured and unsecured loans

Are unsecured loans more risky?

Unsecured loans can be less risky for borrowers than secured loans. That’s because with a secured loan, you are at risk of the lender seizing your asset to service the debt if you fail to repay it. This puts you at risk of losing a valuable item like your home, car or other property. If you don’t repay an unsecured loan, only your credit will be affected.

What is an example of a secured loan?

Secured loans are guaranteed by collateral — an asset that you own.

Examples of secured loans include:

Pawn loans: With a pawn loan, a valuable item you own acts as collateral. The lender, known as a pawnbroker, holds the item for the term of the loan until the loan amount, plus interest and fees, is repaid.

Car loans: When you take out an auto loan, the car you’re purchasing acts as collateral for the loan. If you fail to make payments on an auto loan, the lender has the right to repossess the vehicle.

Home equity loans: A home equity loan — also referred to as a second mortgage — uses your home as collateral against a lump-sum loan of up to 80% of the value of your property, to be repaid with interest according to a fixed schedule.

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