A secured loan is backed by an asset, called collateral, that the lender can seize if you default. An unsecured loan relies only on your promise and your credit history. In Canada, mortgages and car loans are typically secured, while credit cards and most personal loans are unsecured. Secured borrowing usually costs less because the lender risk is lower, but it puts an asset on the line. Unsecured borrowing costs more but exposes no property to seizure.
How Collateral Changes the Deal
When a loan is secured, the lender knows it can recover value by taking and selling the asset. That reduces the risk, which lowers the rate and can increase the amount you qualify for. When a loan is unsecured, the lender has only your credit and income to rely on, so it charges more and may limit the amount. The difference in cost can be significant on a large loan, and smaller on a short one.
| Feature | Secured loan | Unsecured loan |
|---|---|---|
| Collateral | Required | None |
| Typical rate | Lower | Higher |
| Approval | Easier with an asset | Depends on credit |
| Risk if you default | Asset can be seized | Credit damage and collections |
| Common examples | Mortgages, car loans, HELOCs | Credit cards, personal loans |
What Can Be Used as Collateral
- Real estate. A home or land, often for large loans or lines of credit.
- Vehicles. Cars, trucks, and recreational vehicles.
- Savings. A deposit or investment account held as security.
- Equipment or inventory. Common in business lending.
- Investments. Some lenders accept a portfolio as security.
The Risk You Take With a Secured Loan
Defaulting on a secured loan can mean losing the asset, not just damaging your credit. On a car loan, the lender can repossess the vehicle. On a home equity loan or HELOC, the lender can take steps against your home. That is a serious consequence, and it is why a lower rate on secured borrowing is not automatically the better choice. Ask yourself whether you could keep paying if your income dropped, and whether the asset is one you can afford to lose.
When to Choose Secured
- You need a large amount and want a lower rate.
- You have an asset you are comfortable pledging.
- Your credit is weaker and a secured loan improves your odds.
- The loan is for the asset itself, such as a car or a home.
When to Choose Unsecured
- You need a smaller amount for a short period.
- You do not want to risk an asset.
- Your credit is strong enough to qualify at a reasonable rate.
- You value flexibility and simplicity over the lowest possible rate.
Building Back After a Default
If you have defaulted on a secured loan, the priority is to deal with the shortfall and protect the rest of your credit. Contact the lender before you miss a payment if you can, because options shrink once you are in default. A non-profit credit counsellor can help you plan, and a licensed insolvency trustee can explain formal options if the debt is beyond repayment. Acting early usually produces a better outcome than waiting.
What Happens When You Default
On a secured loan, the lender can take possession of the collateral and sell it to recover what you owe. If the sale raises less than the balance, you still owe the difference, and the lender can pursue it. On an unsecured loan, the lender cannot seize property without a court process, but it can report the default, send the debt to collections, and sue within the limitation period. A judgment can lead to garnishment. Neither outcome is good, which is why the decision should rest on whether you can carry the payment, not only on which rate is lower.
Choosing for a Specific Purchase
If the loan is for the asset itself, a secured structure is normal and often cheapest. If the loan is for a general expense, an unsecured loan avoids putting property at risk. Ask what the lender will accept as collateral and what the rate difference actually is. A small rate saving is rarely worth exposing an asset you cannot afford to lose.
Sources and further reading
- Financial Consumer Agency of Canada, for guidance on secured and unsecured borrowing.
- Office of the Superintendent of Financial Institutions, which supervises federally regulated lenders.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.