When it comes to personal finance, individuals often find themselves needing additional funds to meet different financial goals in their lives. These could be a whole plethora of things – buying a house, funding an education, or simply upgrading a vehicle. In Canada, there are two primary ways to borrow money – secured loans and unsecured loans. In this article, we will focus on secured loans which offer borrowers the chance to access large amounts of money at a lower interest rate typically than unsecured loans, all while offering lenders increased security. In this article, we share what a secured loan is, how it works in Canada, pros and cons, and any additional considerations for borrowers who may be considering a secured loan. So – what is a secured loan?
What is a secured loan?
A secured loan is a way to borrow whereby the borrower uses an asset or property as collateral for the lender. This collateral acts as a form of security for the lender in case the borrower is unable to repay the loan for any reason. In Canada, typical assets used as collateral for secured loans include property or real estate, vehicles, valuable possessions, and investments. The fact that the lender is able to seize and sell the associated collateral if the loan is left unpaid provides them with a guarantee, meaning secured loans are much less risky for the lender than unsecured loans.
How do secured loans work in Canada?
In Canada, secured loans work in a similar way to other countries. When an individual applies for a secured loan, the lender reviews the value of the asset that is being offered as security collateral for the loan. Based on this evaluation, an amount to be lent will be approved. At this point, the borrower and lender will agree upon the terms of the loan, include the interest rate, repayment term, and any additional fees. Once the secured loan is approved and the terms are agreed, the borrower will receive the loan and begin repaying their secured debt in line with the agreed terms. Different types of loan are generally secured by different types of asset:
- Lines of credit are secured by accounts receivable and inventory.
- Demand loans are secured by vehicles and equipment.
- Term loans are secured by real estate.
What are the advantages of secured loans?
There are many advantages of secured loans, including the following:
- Lower interest rates. Because of the security of the collateral associated with the loan, secured loans often have lower interest rates compared with unsecured loans. The collateral leaves less risk for the lender, and subsequently more favourable interest rates for the borrower.
- Higher loan amounts. As the collateral offers security for the lender, borrowers may be able to access larger amounts of loan than they would with unsecured loans.
- Quicker approval. Secured loans can be much quicker to qualify for, given that the collateral mitigates some of the risk of lending. This is particularly helpful for individuals with poorer credit scores or a limited credit history.
- Credit score building. By successful repaying a secured loan, you can see a positive impact on your credit score as it shows that you can manage debt responsibly.
What are the disadvantages of secured loans?
As with any financial product, there are disadvantages too:
- Risk to assets. If you are to default on a secured loan, the lender has the right to seize the associated collateral and sell it. This can mean you lose a valuable asset ,like a home or a car.
- Complex process. Secured loans can have a more complex application process as there is a need to assess the value of the collateral, and any associated legal considerations.
- Possible over-borrowing. As secured loans enable you to take out larger loans, you could be tempted to borrow more than you need or are able to repay comfortably. This can lead to financial strain and potentially other financial challenges as a result.
What should you consider as a borrower?
If you are thinking about taking out a secured loan, there are a few steps you should take before committing to a new loan.
- Understand your need. Before applying for a secured loan, assess whether you truly need additional finance before risking an asset as collateral.
- Browse different products. Different lenders offer different terms and interest rates for secured loans. Research different options to find the best deal terms for you and your financial needs.
- Understand the terms. You should carefully review the terms and conditions of the secured loan agreement, including interest rates, repayment schedule, and any additional fees before your commit.
- Ability to repay. Ensure you have a clear repayment plan in place and are confident in your ability to meet the loan obligations before committing.
Got more questions about ‘what is a secured loan?’ Secured loans in Canada offer individuals a way to access large amounts of funds, often at a lower interest rate. Often, associated collateral gives lenders more confidence to allow you to borrow. If you are considering a secured loan but have questions, book a free consultation with Spergel. Our Licensed Insolvency Trustees will review your financial circumstances and provide you with the advice you need.