Loan Cost Glossary: Key Terms Explained
Understanding a loan means understanding its vocabulary. This glossary defines the terms lenders and regulators use to describe the cost of borrowing, from principal and interest to APR, amortization and prepayment.
Lenders, regulators and loan agreements use a specific set of terms to describe how much credit costs. Comparing offers is much easier when the same words mean the same thing across products. The definitions below follow the language used in the Criminal Code, the Criminal Interest Rate Regulations and federal and provincial consumer protection guidance.
Rate versus cost
Interest and the annual percentage rate describe the price of credit, while the cost of borrowing is the total dollar amount you pay. For payday loans, Canada caps the cost of borrowing rather than the rate, because a flat fee over a very short term produces an extremely high annualised rate.
Secured versus unsecured
A secured loan is backed by collateral the lender can seize on default; an unsecured loan is not. Payday loans are unsecured and cannot require property as collateral, which is part of why they are defined separately in the Criminal Code.
definition
| Item | Value | As of | Source |
|---|---|---|---|
| Principal | The amount of money borrowed, before interest and fees are added. On a payday loan it is the amount advanced to the borrower. | 2026-09-16 | Instalment.ca Editorial Team |
| Interest | The aggregate of all charges and expenses paid or payable for advancing credit, whether in the form of a fee, fine, penalty, commission or other charge, excluding repayment of the credit advanced. | 2026-09-16 | Instalment.ca Editorial Team |
| APR (annual percentage rate) | The cost of credit expressed as an annualized rate, calculated in accordance with generally accepted actuarial practices and principles. Canada's criminal rate of interest is an APR that exceeds 35%. | 2026-09-16 | Instalment.ca Editorial Team |
| Effective annual rate (EAR) | The annual cost of credit when compounding is taken into account. An APR of 35% is roughly 41.2% when compounded monthly; the criminal rate was formerly expressed as 60% EAR. | 2026-09-16 | Instalment.ca Editorial Team |
| Cost of borrowing | The total of all amounts a borrower must pay under, or as a condition of, a loan agreement, excluding default charges and repayment of the amount advanced. For payday loans the federal limit is $14 per $100 advanced. | 2026-09-16 | Instalment.ca Editorial Team |
| Amortization | The period over which a loan is scheduled to be paid off in regular payments. A longer amortization lowers each payment but increases the total interest paid. | 2026-09-16 | Instalment.ca Editorial Team |
| Secured loan | A loan backed by collateral that the lender can seize if the borrower defaults, such as a mortgage secured by a home. Security lowers the lender's risk and can reduce the interest rate. | 2026-09-16 | Instalment.ca Editorial Team |
| Unsecured loan | A loan not backed by collateral, so the lender relies on the borrower's creditworthiness and ability to repay. Payday loans are unsecured and cannot require property as collateral. | 2026-09-16 | Instalment.ca Editorial Team |
| Prepayment penalty | A fee for paying a loan off early. Many consumer credit rules prohibit a prepayment penalty: borrowers may generally repay a payday loan early without an extra charge. | 2026-09-16 | Instalment.ca Editorial Team |
| Cosigner | A person who signs a loan alongside the borrower and is equally responsible for the whole debt if the borrower does not pay. Creditors ask for a cosigner to reduce their risk. | 2026-09-16 | Instalment.ca Editorial Team |
| Instalment loan | A loan repaid in a set number of scheduled payments (instalments) over a fixed term, rather than in a single lump sum. The criminal rate of interest applies to instalment loans. | 2026-09-16 | Instalment.ca Editorial Team |
| Payday loan | An advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature, excluding overdraft protection, margin loans, pawnbroking, lines of credit and credit cards. | 2026-09-16 | Instalment.ca Editorial Team |
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Frequently Asked Questions
What is the difference between interest and APR?
Interest is the total of all charges and expenses for advancing credit. APR expresses that cost as an annualised rate calculated using generally accepted actuarial practices.
What does cost of borrowing mean?
It is the total of all amounts a borrower must pay under a loan agreement, excluding default charges and repayment of the amount advanced. For payday loans it is capped at $14 per $100.
What is amortization?
The period over which a loan is scheduled to be paid off in regular payments. A longer amortization lowers each payment but increases total interest.
Are payday loans secured or unsecured?
Payday loans are unsecured. The Criminal Code definition excludes security on property, so a payday lender cannot take collateral for the loan.
Sources
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
- Instalment.ca Editorial Team
Sources are provided for verification. Instalment.ca is not affiliated with these organisations.
Last updated: September 16, 2026 · By the Instalment.ca Editorial Team
We research Canadian lending rules and update these pages when the law, the data, or the available offers change. We are not a lender and we do not provide personal financial advice.
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This is general information, not financial, legal, or tax advice.
Rates and terms vary by lender, creditworthiness, and province. Figures shown are examples only.