Secured Loans in Canada 2023
What You Should Know
- You’ll have a better interest rate with a secured loan than an unsecured loan.
- Your lender has less risk because they can seize the asset if you don’t pay.
- A loan can be secured by real estate, cars, or many other assets.
- The secured item is known as collateral.
Chances are, you already understand what a secured loan is but aren’t familiar with the term. The most common type of secured loan is a mortgage. Your Canadian mortgage lender secures the loan with your home. As a result, if you don’t make mortgage payments, the lender can repossess your home. However, secured loans are the secret to low interest rates because your lender has less risk.
The secured home is known as collateral, and the lender has a lien on the property. The lien is a legal agreement that allows the lender to take your home if you don’t make monthly mortgage payments. However, you can collateralize many different assets to get a secured loan. Other examples include vehicles, bank savings, and investment accounts.
These are different from an unsecured loan because your lender has no collateral. To compensate for this risk, unsecured loans have a higher interest rate. Continue reading to learn more about secured loans and how to get one.
Tip: Secured vs Unsecured Loans
| Secured Loans | Unsecured Loans | |
|---|---|---|
| Interest Rate | Low | High |
| Credit Limit | High | Low |
| Term | Long | Short |
| Ease of Application | Lengthy | Quick |
| Collateral Needed | Yes | No |
Every loan in Canada can be categorized into secured or unsecured. The primary difference is the need for collateral.
- Unsecured loans have no collateral, meaning they are riskier loans for lenders. Unsecured loans have higher interest rates and may have shorter loan terms and lower borrowing limits. Unsecured loans include personal loans and credit cards.
- A secured loan lets you borrow more at a lower cost, but it does mean that you need to have existing collateral available. They can have a lengthy application process. Collaterals need to be verified, and in the case of a home, a home appraisal and inspection are necessary to determine the home's value. This can add costs and may not be ideal for quickly needing money.
Secured Loan Advantages & Disadvantages
| Advantages | Disadvantages |
|
|
Advantages
- Lower Interest rate: Since you are reducing the risk for lenders, you should receive a lower interest rate than unsecured loans.
- Higher borrowing limits: Lenders will also likely lend you more money.
- Longer payback periods: You can reduce your monthly payments by extending your term length. However, this will result in more lifetime interest paid.
- Funding with a low credit score: Some options, such as car title loans, provide financing to those who previously couldn't get a loan.
Disadvantages
- Longer funding speeds: Since there is an extra step of appraising your collateral, the loan will take longer to process and an unsecured loan.
- Potential loss of collateral: Failing to make payments will result in the seizure of your asset.
The 3 Types of Secured Loans
Almost everyone is familiar with a mortgage. However, existing homeowners can collateralize their home equity using various products. This is commonly done to finance large projects such as renovations or buying a second home. Common products include:
- Home Equity Line of Credit: Otherwise known as a HELOC, this is a top-rated lending product. A HELOC allows you to access funds up to a predetermined limit. Similar to a credit card, you can borrow and repay as necessary.
- Second Mortgage: A second mortgage is similar to a HELOC, except it provides funds upfront. The loan is disbursed in a lump sum and paid back over the term of the loan. Home equity loans are typically used for large projects such as home remodelling.
- Reverse Mortgage: This option allows homeowners over 55 to receive a lump sum or monthly income from their homes. The best part is that you only need to pay it back once you sell or move from the house.
Similar to securing your home, you can secure vehicles. While it's possible to collateralize boats and RVs, most commonly borrowers secure a car. However, these loans have less favourable lending conditions than securing a home. For example, the interest rates will be higher, the maximum loan size will be smaller, and you'll likely have to pay back the loan faster. This is because vehicles are riskier assets to a lender.
Vehicle loans are riskier to the lender because there is a higher probability of not being able to collect the asset in foreclosure. The car is mobile and depreciates over time. However, there are two main types of vehicle loans in Canada;
- Car Loan: This is a mortgage for cars. It finances the cost of buying a car you don't already own. Typically, the lender will require a down payment and a good credit score. You will then make regular payments until you have paid the loan in full.
- Car Title Loan: This allows existing car owners to borrow against their ownership. Most lenders will enable you to borrow up to 50% of the car's market value for one week to five years. However, interest rates are very high and generally range from 30% to 60%.
Finally, you can also collateralize some investments you have made. Surprisingly, these loans can have favourable conditions despite being secured by traditionally risky assets. For example, Questrade and Interactive brokers provide margin rates below 10.00%.
- Stock Brokerage Margin: Many unregistered investment accounts in Canada provide access to margin. You can borrow against your investment portfolio to buy more stocks. The loan rate is generally very low, but it only applies to purchasing new assets within the same brokerage.
- Investment Secured Line of Credit: Some banks let you collateralize your investments. However, the interest rates on these loans are generally higher than margin rates. Additionally, you can only secure low-risk investments held at the same institution such as GICs.
Frequently Asked Questions
Yes, you can get many types of bad credit loans. Secured loans are easier to get with bad credit than unsecured loans because they provide more safety to the lender. Some lenders have no minimum credit score required to get a loan, and some do not check your credit score.
Home equity is how much of the home you own. It is the difference between the market value and the total amount borrowed against the house. Home equity can be positive or negative, depending on whether the home's market value is more or less than the amount of money that has been borrowed.
Most likely, your home equity will increase over time due to paying off your mortgage and increases in the home value. You can borrow your home equity to finance a business or second home.
Yes, your home can be used as collateral for more than one secured loan. For example, if you have a mortgage on your house, you can still take out a home equity loan or a HELOC. You may also even take out a third mortgage through some private mortgage lenders.
When you secure a loan against your home, lienholders have a stake in your home. Having more than one lienholder means that there will be a priority in who will be repaid first if you default on your loans.
- Your first mortgage is the lien held by the mortgage lender that is first in line should you default.
- If you take out a second mortgage, the second mortgage lender will be second in line.
If you default, your home will be sold. The amount recovered will first be paid to the primary lien holder until they regain their total amount. Any excess amount is then delivered to the second lienholder and other lienholders until no amount is left or the debt is paid back in full.
An underwater mortgage happens when the outstanding debt on your mortgage is more than the home's value. This happens if home prices fall and your existing home equity is not enough to cover the fall.
Being underwater on your mortgage is dangerous because your mortgage lender may not recover the amount you borrowed should you default. Your mortgage lender may take steps as far as a foreclosure. In a foreclosure, your mortgage lender takes possession of your home and sells it. The money from the home sale will be used to pay back the mortgage. You will be evicted from your home, and if the foreclosure did not cover the mortgage, you might still need to repay that amount.
Since the first mortgage lender will still be first in line to recover money, they will not be affected should you take out a second mortgage or a home equity loan. Taking out a HELOC will not affect your first mortgage.