Secured loans and lines of credit are "secured" because they are backed by some underlying asset like a home or a car. If you can't pay back the loan or default, the lender gets to keep the asset. As a result, these types of loans and lines of credit tend to have lower risk for the lender and lower interest rates.
Mortgages are the most common type of secured loan. They are secured by a home or property. Mortgages usually have the lowest interest rates compared to other types of loans and lines of credit. If you default on your mortgage or the value of the home drops below the borrowed amount, your lender may choose to foreclose your home by forcing you to sell the home and pay back the lender.
When you buy a home, you can only borrow a certain percentage of the total price of the home. This is called the loan-to-value or LTV, and it is the amount borrowed compared to the total value of the home or property. Your downpayment makes up the rest and acts as a buffer for the lender in case you default on your payments or the price of the home falls. For example, a home with a downpayment of 20% and a LTV of 80% can drop in price by up to 20% before the lender risks losing a lot of money on the loan.
Conventional mortgages have an LTV of up to 80%. Insured mortgages can have an LTV of up to 95%.
A home equity line of credit is a line of credit that allows you to tap into your home equity. In Canada, you can borrow up to 60% of your home's value as long as your mortgages and HELOCs combined are 80% or less of your home's value. HELOCs are secured by a home or property and usually have interest rates slightly higher than mortgages but much lower than other lines of credit.
Similar to mortgages, your lender may foreclose on your home if you default on your payments. However, unlike mortgages, you have the flexibility to borrow and repay any amount at anytime and only have to make interest-only payments.
Many people finance their cars and automobiles using a car or auto loan. Although these loans are secured by the car, their interest rates are usually much higher than mortgage or HELOC rates. This is because cars can quickly depreciate or decrease in value and lenders risk losing money even if they repossess and sell the car. Some car dealers and manufacturers may offer special promotions, however, for low or even zero interest rates.
Investment loans such as margin can let you leverage your existing investment portfolio to earn even more on your investments. They are backed by your investments and usually offer lower interest rates than unsecured loans or lines of credit. The leverage can be risky, however, as your lender (usually your broker) can liquidate your investments if the value of your account drops below their margin requirements.
In Canada, you can borrow up to 70% of an investment's value using margin. Rules regarding margin lending are set by the Investment Industry Regulatory Organization of Canada (IIROC).
Unsecured loans and lines of credit are "unsecured" because they are not backed by any asset. Instead, they rely on the borrower's credit worthiness and ability to repay the loan. If the borrower defaults on the loan or declares bankruptcy, lenders have almost no ability to recoup their losses. As a result, these types of loans and lines of credit are considered higher risk and usually have much higher interest rates than secured loans and lines of credit.
Credit cards are one of the most popular and common ways Canadians use to borrow. According to the Canadian Bankers Association, there were over 75.8 million credit cards, or on average two for every Canadian, in circulation in Canada in 2018.
And it's no wonder - credit cards are the easiest way to borrow and spend money. Many have security features and fraud protection, and some even have cashback or points programs that you can use to redeem for rewards. As long as you pay off your balance every month, credit cards can be a great alternative to cash or debit.
However, if you keep a balance on the card you will have to pay a very high interest rate on the balance. Some credit cards charge more than 20% APR and it is easy to get stuck in a debt cycle if you let your credit card debt grow. Lenders charge high interest rates because credit cards are unsecured and there's nothing except your credit worthiness backing them up. The high risk of default and loss requires them to charge high interest rates to make up for their delinquencies.
Payday loans or cash advances are short-term loans meant to help people get quick access to cash before their next payday. While they can help people without access to other financing solutions, they usually charge high interest rates and fees. Many borrowers find themselves in a debt cycle because they can't pay back their payday loans and the interest and fees build up very quickly.
Student loans are a special kind of unsecured loan. Even though they are not secured by any asset, you cannot discharge your student loans in Canada until at least 7 years after you finish your studies. If you declare bankruptcy during this 7 year period, you will still keep and have to make payments on your student loan debt.
Fortunately, both federal and provincial student loans offer repayment assistance programs that can lower or defer your loan payments. Check with your province's or territory's student aid office for more details.
A personal loan or line of credit is your standard unsecured debt. Lenders will use your employment income, credit score and credit history, as well as many other factors in determining how much you can borrow and at what interest rate. Personal lines of credit usually have variable interest rates that are based on the Prime rate.
Different types of loans and lines of credit can offer different payment options. They include payment plans, interest-only payments, minimum payments, lump-sum payments, pre-payments and accelerated payments.
Most loans have payment plans where you pay a regular fixed payment or installment for a set amount of time called the term of the loan. Generally, payments are made every week, biweekly, every month, or bimonthly. Part of your payment will go to pay off interest and part of your payment will go to pay off your loan balance or principal. While some lenders offer pre-payment or deferral features, payment plans give you very little flexibility in determining when and how you pay off your debt.
Examples of loans with payment or installment plans include most personal loans, mortgages, car and auto loans and student debt.
Some types of loans and lines of credit allow for interest-only payments. Most lending products require you to pay back part of your principal in every payment. These include mortgages and car and auto loans. However, some products allow you to make interest-only payments. These can be much smaller than normal payments.
Examples of products with interest-only payments are: HELOCs and investment loans such as margin.
Some types of loans and lines of credit have minimum payments. Credit cards are a popular example. These minimum payments are usually set to a small fixed amount like $25 or $50 or a small percentage of your total borrowed amount like 1%. Minimum payments are often much lower than payments for typical loans and may even be smaller than the interest charged.
Minimum payments can be a double-edged sword, however. Although they offer you more flexibility especially during times of financial stress, because they let you pay less than your interest, your debt can increase month over month. This can snowball and lead to a debt cycle where you borrow more and more and eventually can't afford to pay the loan back.
Examples of loans and lines of credit with minimum payments include credit cards, student loans, most personal lines of credit.
Some loans and all lines of credit allow you to make lump-sum payments of up to the entire borrowed amount. This means you can pay off your debt faster at anytime and pay less interest overall. Examples of lump-sum payment borrowing products include HELOCs, credit cards, personal lines of credit, and investment loans. You can also pay off your provincial and federal student loans at anytime.
Most loans are paid back on a fixed schedule. However, most mortgages and some other types of loans have features that let you make larger regular payments and occasionally make pre-payments towards your principal. These include RBC's Double-Up Mortgage Payments and Scotiabank Match-a-Payment. Other banks like TD, CIBC, and BMO also offer accelerated payment or pre-payment options in their mortgage products.
There are often limits to how much you can pre-pay, however. If you go over these limits, you may be subject to a pre-payment penalty. For closed mortgages, this is usually the higher of 3 months' interest or the interest rate differential (IRD). The IRD is the difference between the interest you would pay on the remainder of your current mortgage versus the interest you would pay if you refinanced your remaining mortgage term. If interest rates have dropped since you financed your mortgage, your IRD would go up.
Borrowing money always comes at a cost. Whether it's for a home or for a new sweater, all loans and lines of credit will charge interest and fees. High-risk or unsecured debt will charge higher interest and fees in order to make up for the likelihood that borrowers default on their payments. Likewise, low-risk or secured debt will charge lower interest and fees.
Low interest rate loans and lines of credit are usually ones that are secured. This means that they are backed by some asset like a home or car that the lender can sell in case you can't pay and default on the debt. Because of the lower risk, lenders can offer a low interest rate.
Examples of low-interest rate loans and lines of credit include mortgages, HELOCs, and investment and margin loans. Car and auto loans are also secured and have lower interest rates compared to unsecured debt, but their rates are higher than other types of secured loans.
Fixed interest rates are "fixed" at a certain rate for the entire term of the mortgage.
Examples of loans and lines of credit with fixed interest rates include:
Variable interest rates are "variable" because they can go up and down throughout the entire term of the loan. They are usually based on a rate called the Prime rate. Each lender has their own Prime rate but the major banks and lenders in Canada usually have the same Prime rate.
Examples of loans and lines of credit with variable interest rates include:
You may have noticed that many lenders show an APR rate that may be different from the interest rate. The annual percentage rate or APR is usually defined as the cost of borrowing over a year. It combines both the interest and the fees of a loan, giving you a better idea of how much a loan really costs.
For example, let's say you have a car and auto loan of $40,000 at 6% for 5 years and you had to pay $1,000 in upfront fees. Your payments on the loan will cost you $46,398 over the 5 years. Including the fees, you will have paid $47,398 ($46,398 + $1,000) over the 5 years. This translates to an APR of 7.058% - higher than your original 6% interest rate.
Short-term loans are notorious for very high APR rates. In Canada, most loans are limited to a maximum APR of 60% but payday loans have a special exception. In Ontario, payday loans can charge an APR of up to 319% (as of 2018).
Many lenders charge additional fees on top of the interest they charge.
Many loans and lines of credit have a similar set of basic fees. These include:
When you apply for a mortgage, you may have to pay for special costs involved in writing a mortgage. These include:
Mortgage fees are usually considered part of the closing costs of buying a home. More information about closing costs.
Credit cards have many fees that you might not notice. These include:
|#Month||Beginning Balance||Interest||Principal||Ending Balance|
|1||$ 10,000||$ 25||$ 155||$ 9,845|
|2||$ 9,845||$ 24||$ 155||$ 9,690|
|3||$ 9,690||$ 24||$ 156||$ 9,534|
|4||$ 9,534||$ 23||$ 156||$ 9,378|
|5||$ 9,378||$ 23||$ 156||$ 9,222|
|6||$ 9,222||$ 23||$ 157||$ 9,065|
|7||$ 9,065||$ 22||$ 157||$ 8,908|
|8||$ 8,908||$ 22||$ 158||$ 8,750|
|9||$ 8,750||$ 22||$ 158||$ 8,592|
|10||$ 8,592||$ 21||$ 158||$ 8,434|
|11||$ 8,434||$ 21||$ 159||$ 8,275|
|12||$ 8,275||$ 20||$ 159||$ 8,116|
|Year #1 End, You will have $ 8,116 remaining on your loan|
|13||$ 8,116||$ 20||$ 160||$ 7,957|
|14||$ 7,957||$ 20||$ 160||$ 7,797|
|15||$ 7,797||$ 19||$ 160||$ 7,636|
|16||$ 7,636||$ 19||$ 161||$ 7,476|
|17||$ 7,476||$ 18||$ 161||$ 7,315|
|18||$ 7,315||$ 18||$ 161||$ 7,153|
|19||$ 7,153||$ 18||$ 162||$ 6,991|
|20||$ 6,991||$ 17||$ 162||$ 6,829|
|21||$ 6,829||$ 17||$ 163||$ 6,666|
|22||$ 6,666||$ 16||$ 163||$ 6,503|
|23||$ 6,503||$ 16||$ 163||$ 6,340|
|24||$ 6,340||$ 16||$ 164||$ 6,176|
|Year #2 End, You will have $ 6,176 remaining on your loan|
|25||$ 6,176||$ 15||$ 164||$ 6,012|
|26||$ 6,012||$ 15||$ 165||$ 5,847|
|27||$ 5,847||$ 14||$ 165||$ 5,682|
|28||$ 5,682||$ 14||$ 166||$ 5,516|
|29||$ 5,516||$ 14||$ 166||$ 5,350|
|30||$ 5,350||$ 13||$ 166||$ 5,184|
|31||$ 5,184||$ 13||$ 167||$ 5,017|
|32||$ 5,017||$ 12||$ 167||$ 4,850|
|33||$ 4,850||$ 12||$ 168||$ 4,683|
|34||$ 4,683||$ 12||$ 168||$ 4,515|
|35||$ 4,515||$ 11||$ 168||$ 4,346|
|36||$ 4,346||$ 11||$ 169||$ 4,178|
|Year #3 End, You will have $ 4,178 remaining on your loan|
|37||$ 4,178||$ 10||$ 169||$ 4,008|
|38||$ 4,008||$ 10||$ 170||$ 3,839|
|39||$ 3,839||$ 9||$ 170||$ 3,669|
|40||$ 3,669||$ 9||$ 170||$ 3,498|
|41||$ 3,498||$ 9||$ 171||$ 3,327|
|42||$ 3,327||$ 8||$ 171||$ 3,156|
|43||$ 3,156||$ 8||$ 172||$ 2,984|
|44||$ 2,984||$ 7||$ 172||$ 2,812|
|45||$ 2,812||$ 7||$ 173||$ 2,640|
|46||$ 2,640||$ 6||$ 173||$ 2,467|
|47||$ 2,467||$ 6||$ 173||$ 2,293|
|48||$ 2,293||$ 6||$ 174||$ 2,120|
|Year #4 End, You will have $ 2,120 remaining on your loan|
|49||$ 2,120||$ 5||$ 174||$ 1,945|
|50||$ 1,945||$ 5||$ 175||$ 1,771|
|51||$ 1,771||$ 4||$ 175||$ 1,596|
|52||$ 1,596||$ 4||$ 176||$ 1,420|
|53||$ 1,420||$ 3||$ 176||$ 1,244|
|54||$ 1,244||$ 3||$ 176||$ 1,068|
|55||$ 1,068||$ 3||$ 177||$ 891|
|56||$ 891||$ 2||$ 177||$ 713|
|57||$ 713||$ 2||$ 178||$ 536|
|58||$ 536||$ 1||$ 178||$ 358|
|59||$ 358||$ 1||$ 179||$ 179|
|60||$ 179||$ 0||$ 179||$ 0|
|Year #5 End, You will have $ 0 remaining on your loan|