Secured loans offer significantly lower interest rates and higher borrowing limits than unsecured alternatives. However, borrowers risk losing pledged assets if they are unable to maintain payments.
So it is important to dig into “what is a secured loan” to avoid them. Answering this will help you understand how lending backed by collateral works, who it’s best for, and what you need to think about before you commit.
What is a secured loan?
A secured loan is a form of credit in which the borrower pledges an asset as collateral to guarantee repayment. The asset can be a home, vehicle, savings account, etc. It assures the lender that if the borrower fails to repay, they have a legal right to repossess and sell the asset to recover the loaned amount.
In Canada, secured loans are commonly used for major purchases or financial needs where a lower interest rate and larger borrowing capacity are preferred. Because the lender’s risk is reduced through collateral, these loans often come with favourable terms.
Borrowers with limited credit history or lower credit scores may find secured loans beneficial for:
- accessing credit they would not otherwise qualify for,
- or for rebuilding credit responsibly.
Consider Sarah, who owns a home valued at $500,000 and needs $50,000 for a renovation. Using her home equity as collateral, she can access longer repayment terms and better interest rates than an unsecured personal loan.
How does a secured loan work in Canada?
The secured lending process follows a structured path from application to approval and eventual repayment. Understanding its method helps borrowers make good decisions about their financial commitments.
Application process
When applying for a secured loan, lenders evaluate 3 factors:
- Credit profile: To assess risk and interest rates.
- Income proof: To confirm that you can make consistent payments.
- Collateral valuation: To determine your equity.
Loan structure and terms
Once approved, it usually comes in one of two types as below:
- Installment loans: Most secured loans are installment loans, like mortgages and auto loans. With these, you get a lump sum of money upfront and then make regular monthly payments over a set period. For example, a $300,000 mortgage might involve fixed monthly payments over 30 years.
- Revolving credit: Some secured loans offer a more flexible way to access funds, such as home equity lines of credit.
What types of secured loans are available?
Secured loans come in 10 forms. In Canada, they are widely used to finance high-value purchases, improve credit, or access liquidity with competitive interest rates.
4 types of home-based secured loans are:
Mortgage loans
A mortgage is the most familiar type of secured loan in Canada. When you take out a mortgage, your home is the collateral. If you fail to make payments, the lender can initiate foreclosure proceedings to recover the outstanding amount.
Mortgages are long-term loans with lower interest rates due to real estate security. Fixed-rate and variable-rate options are available. And in Canada, the Housing Corporation (CMHC) and Canada Mortgage provide insurance for high-ratio mortgages (less than 20% down payment).
Home equity loans and HELOCs
A HELOC works like a revolving credit account, while a home equity loan provides a lump sum. HELOCs are commonly used in Canada for renovations, debt consolidation, or large purchases. Homeowners with equity in their property can borrow against it using one of those types. A secured home loan has lower rates because it is secured against your home’s value.
Secured personal loans
Secured personal loans allow you to borrow money using non-real estate assets. It is especially useful for borrowers who do not qualify for unsecured loans due to limited or poor credit.
Example: You might use a $10,000 GIC (Guaranteed Investment Certificate) as collateral to borrow a similar amount at a much lower interest rate than you’d get with an unsecured alternative.
4 types of asset-based secured loans are:
Auto loans
This type is secured by the vehicle being financed. If you miss payments, the lender may repossess the car. These loans generally have shorter terms (typically 3 to 7 years). They are available from banks, credit unions, and dealership financing companies.
Example: You purchase a $25,000 SUV using secured loans. In this case, the lender registers a lien against the vehicle, which is removed once the loan is paid off.
Secured credit cards
These products require a cash deposit, usually equal to your credit limit. They are commonly used to build or rebuild credit. Institutions like Capital One and Home Trust in Canada offer secured credit cards with minimal income requirements.
Life insurance loans
With permanent life insurance policies such as whole life or universal life, you can borrow against the policy’s cash value. The plus is that it does not require a credit check. Unpaid balances reduce the death benefit paid to your beneficiaries.
Example: Your whole life insurance policy has $20,000 in accumulated cash value. You borrow $10,000 for tuition, and either repay it later or deduct it from the final payout.
Car title loans
These high-risk loans allow you to borrow money using the title of a paid-off vehicle as collateral. As a result, it is often used by borrowers with bad credit. Besides, interest rates are high, and default can result in losing your car. However, these loans are legal in some Canadian provinces but heavily regulated due to predatory lending practices.
Business secured loans
BDC outlines 4 business-specific secured loan structures:
General security agreements provide claims on all company assets except land and buildings. This comprehensive coverage gives lenders broad protection.
Debentures create fixed and floating charges on all company assets, including real estate. These instruments offer maximum security for lenders.
Collateral mortgages specifically target land and buildings, similar to residential mortgages but for commercial properties.
Personal guarantees make business owners personally liable, allowing lenders to pursue individual assets if business collateral proves insufficient.
Other secured loans are:
Pawnshop loans
Physical items, like jewelry, electronics, or collectibles, back these short-term loans. You leave the item with the pawnshop and receive a small loan. If you repay the loan plus interest, the item is returned. Otherwise, the pawnshop sells it. So, this is a last-resort financing option and is not widely used among mainstream lenders.
Bad credit secured loans
This is specifically for people with poor credit when determining “what is a secured loan?”. You can often find them through online lenders or credit unions. While it still requires collateral, you might find that it comes with higher interest rates or fees. The upside is that if you consistently make your payments, they can be a way to rebuild your credit score.
How to qualify for a secured loan in Canada?
Understanding the eligibility requirements in Canada can make the process smoother. Moreover, it can boost your opportunities to get approval.
Step 1: Get an asset to use as collateral
To qualify, you usually need to either fully own the asset or have enough equity in it. For example, if you are applying for a HELOC, banks require that you have at least 20% equity in your home. That means if your property is valued at $500,000 and your outstanding mortgage is $400,000. Then, your equity of $100,000 meets that threshold.
Step 2: Have a good credit score and a stable income
Most major Canadian banks prefer applicants with a credit score of 650 or higher. However, you may still qualify with a lower score if your collateral is strong enough to offset the risk.
Besides, most lenders in Canada prefer a DTI ratio of 40% or less. For instance, you earn $6,000 per month and your debt payments total $2,000. Your DTI of 33% is considered healthy.
Step 3: Provide supporting documents and get verified
Having your paperwork ready helps speed up the approval process. So, when you apply, be prepared to show:
- Proof of income (T4s, pay stubs, tax returns if self-employed)
- Documentation proving ownership of your asset (e.g., car title, property deed)
- Valid identification
Pros and cons of secured loans
Remember that these loans can offer powerful financial tools, but come with real risks.
There are 5 points that make it a popular choice when people need money.
- Easier approval: Borrowers with limited or damaged credit histories are more likely to qualify if they have collateral.
- Lower interest rates: Because assets back them, lenders face less risk and pass savings on to borrowers.
- Higher borrowing limits: With collateral, lenders could approve larger amounts.
- Longer repayment terms: Many secured loans offer extended terms, reducing monthly payments and improving affordability.
- Credit-building opportunities: Regular, on-time payments can improve your credit profile and help secure better terms in the future.
Example: A borrower with a modest credit score might be denied a $20,000 unsecured loan but be approved for the same amount using a car or investment as collateral and at a lower interest rate.
Beyond that, there are 5 downsides you should be aware of when learn about “what is a secured loan?”.
- Risk of asset loss: If you default, the lender can seize your collateral. This could mean losing your car, savings, or even your home.
- Complicated application process: Some secured loans require detailed appraisals, legal documents, or title searches, which slow approval times.
- Overborrowing risk: Because limits are higher, borrowers might take on more debt than they can comfortably manage.
- Variable interest rates: Some secured loans, such as HELOCs, have variable rates that may increase over time, raising monthly costs.
- Restricted collateral access: While your asset is tied to the loan, you may not be able to sell or withdraw from it freely.
When should you choose a secured loan over an unsecured loan?
Choose secured loans when you need lower interest rates for large amounts and possess valuable collateral, particularly for debt consolidation, major renovations, or business expansion requiring extended repayment terms.
This comparison of secured and unsecured loans will provide a better understanding of these types of loans.
| Feature | Secured Loans | Unsecured Loans |
|---|---|---|
| Collateral Required | Yes | No |
| Interest Rates | Lower | Higher |
| Borrowing Limits | Higher | Lower |
| Approval Time | Longer due to appraisals | Faster |
| Credit Requirements | More flexible | Stricter |
| Default Risk | Asset loss possible | No asset risk |
| Application Process | Complex with documentation | Simpler |
FAQs about Secured loans
Can I pay off a secured loan early?
Yes. Do not forget to check for prepayment penalties, which typically range from 1 to 3 months' interest.
What happens if I default on a secured loan?
It is a loan that uses a non-real-estate asset as collateral. These loans are ideal for Canadians who need funds for large purchases, debt consolidation, or emergencies but do not qualify for unsecured credit due to limited credit history or low scores.
How can I avoid defaulting on a secured loan?
Here are 5 ways to protect yourself: Create a budget: Monitor your cash flow to make sure you can meet all obligations. Borrow within your means: Avoid over-leveraging just because collateral allows larger loans. Set up auto-payments: Ensures on-time payments and avoids late fees. Establish an emergency fund: This provides a buffer if your income suddenly drops. Communicate with your lender: Many lenders offer payment flexibility, deferral options, or refinancing.
The bottom line
This type of loan can be valuable for people who need larger loan amounts or have less-than-perfect credit. However, the risks must be weighed against the benefits based on your financial situation.
To truly understand lending, you need to learn how different loan types function. In the end, answering the question “what is a secured loan?” equips borrowers to make wise, purposeful financial decisions.
