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Secured Loans vs Unsecured Loans

When looking for financing in Canada, borrowers will often come across loan options that are either secured or unsecured. Secured and unsecured loans have unique functions and advantages that can apply to borrowers in various situations. Given that most loan options in Canada are either secured or unsecured forms of financing, understanding the differences can help you easily navigate your application process 

What’s the difference between a secured and unsecured loan?  

As mentioned, secured and unsecured loans benefit borrowers differently based on their financial situation and the purpose of their loans. Knowing the key differences between secured and unsecured loans can make it easier to decide which loan option aligns best with your goals.   

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Secured loans   

A secured loan is a type of financing secured by collateral, like a car or a home. Lenders reserve the right to use this collateral to recoup the outstanding balance of funds advanced if a borrower defaults on their loan or cannot continue making payments. Traditional home equity loans are great examples of secured loans because most home equity loan lenders use the borrower’s home as collateral.   

Unsecured loans 

Unlike a secured loan, unsecured loans don’t require the borrower to submit any collateral. This means borrowers won’t place their assets at risk when applying. Without collateral, lenders will place more weight on the individual’s creditworthiness to mitigate risk as much as possible.  

Borrowers may also pay higher interest rates as a premium to compensate for the lack of collateral. Payday loans and credit cards are common unsecured loans that don’t require the borrower to have any collateral. 

Key differences between secured and unsecured loans

Other than the fact that secured loans use collateral and unsecured loans don’t, some key differences separate these two forms of financing

Secured Loans  Unsecured Loans 
Lower interest rates  Higher interest rates 

 

Borrowers don’t need an above-average credit score to qualify  Borrowers may require higher credit scores to get approved 
Higher borrowing limits (supported by collateral)  Can have lower borrowing limits (no collateral) 
Lenders can seize collateral if a borrower is unable to make payments  Lenders must initiate collections through legal means 

When do you get a secured loan?  

Secured loans have specific uses and benefit borrowers based on their financial situations. Individuals typically look for a secured loan when they 

  • Have an asset they can use as collateral  
  • Don’t have an exceptionally high credit score  
  • Want lower interest rates  
  • Want to make a significant purchase like buying a car or a home  
  • Are self-employed with irregular income and can’t qualify for unsecured loans  

When do you get an unsecured loan?  

With unsecured loans like payday loans and credit cards, borrowers aren’t looking for large funds to finance major projects. Instead, they are looking for loans that can be used for more personal expenses. Individuals look for an unsecured loan when they:  

  • Do not have an asset that they can present as collateral  
  • Are looking to get approved quickly for small amount 
  • Do not need access to a large amount of funds  

What happens if you default on an unsecured loan?  

Lenders usually have a collection department dealing with borrowers who defaulted on loan payments. A loan defaults if it’s been 30 days or more since the borrower defaulted on their payments. Generally, the time for a loan to default depends on the kind of loan, the lender, and the terms and conditions of the loan itself.  

Does a secured loan affect your credit score?  

A secured loan can affect your credit score positively or negatively depending on whether you make timely payments. If you have budgeted appropriately and consistently make monthly payments on time, you will likely see a positive impact on your credit score.  

Conversely, your credit score may take a hit if you cannot pay on time. The best way to make the most of your secured loan is by making timely installments to improve your financial standing and save you the stress of worrying about late payments.  

 

Conclusion: a secured loan at Alpine Credits  

Alpine Credits has been helping homeowners access secured home equity loans across Canada for over 50 years. A home equity loan from Alpine Credits is flexible in its use, meaning that the funds can be used to fulfill a wide range of financial needs, including home renovations, business investment, and loan consolidation.   

Alpine Credits puts little emphasis on your credit score or income when you apply. Instead, they prioritize the equity you have available in your home. With quick approval times and a reliable lending process, this is a great solution for homeowners seeking secured home equity loans 

To learn more, fill out the application form on our website and a Financial Solutions Specialist will reach out to guide you through your application. 

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Frequently asked questions

It depends on what the purpose of your loan is. A secured loan could be better if you want to renovate your home or take a large loan because of the relatively lower interest rate. However, an unsecured loan may be better if you want to make a minor purchase and you’re able to pay down the loan quickly. 

Canada’s most common unsecured loans are payday loans or credit card financing. An unsecured loan doesn’t require the borrower to submit any collateral.  

In Canada, borrowers commonly come across secured loans like home equity and auto loans. These loans are secured by collateral like a borrower’s home or car.  

A secured loan allows borrowers, including those with less-than-ideal credit scores, to access funding. It can benefit asset owners looking to get lower interest rates to finance a large project.   

Assets like a car or a house are what you can present as collateral. However, if you don’t have an asset to secure the loan, it may be better to consider unsecured financing.     

It generally depends on the terms of the loan. However, since unsecured loans tend to come with a comparatively higher interest rate, they can be risky for borrowers who are unable to pay down the principal loan fast enough.