A secured loan is backed by an asset you pledge, such as a home, a car or savings, which the lender can take and sell if you don’t repay. An unsecured loan has no asset behind it: the lender relies on your income and credit history, and if you stop paying it has to collect through a collection agency or the courts. That difference decides how much the debt costs, how much you can borrow and what is at stake if repayment goes wrong. This page explains how secured loans work, the main types of secured and unsecured debt in Canada, and what happens on default. It is one of our personal loans and lines of credit guides.
Secured vs unsecured debt: the difference
| Secured debt | Unsecured debt | |
|---|---|---|
| Collateral | Yes, a specific asset named in the agreement | None |
| Cost | Usually lower, because the lender can recover its money from the asset | Usually higher, to cover the lender’s greater risk |
| How much you can borrow | Linked to the value of the asset | Linked to income and credit history |
| Lender’s remedy if you stop paying | Repossess or sell the pledged asset | Collections, then a lawsuit and a court judgment |
| Court order needed to take the asset | Not usually for the pledged asset, though rules vary by province and type of loan | Yes, before it can garnish wages or seize property |
| Examples | Mortgage, HELOC, car loan, car title loan, secured credit card | Credit card, most personal loans, unsecured line of credit, government student loans |
| Effect on credit if payments are missed | Reported to the credit bureaus | Reported to the credit bureaus |
How a secured loan works
- You pledge collateral: a property, vehicle, savings deposit, GIC or investment account.
- The lender registers its claim: a mortgage or charge on the land title for property, or a security interest in the provincial personal property registry for a vehicle or other assets.
- You receive the funds and repay them in the agreed payments of principal and interest.
- The lender releases its claim when the loan is fully repaid.
- If you default, the lender can take and sell the collateral, and you can still owe any shortfall if the sale doesn’t cover the debt.
Because the lender can fall back on the asset, it takes less risk, which is why secured borrowing generally costs less and allows larger amounts than unsecured credit.
Types of secured loans
- Mortgage. Your home is the collateral, and mortgages are the largest secured debt most households carry. If you default, the lender uses power of sale or a court foreclosure process, depending on the province; our guide to the mortgage foreclosure process explains each.
- Home equity loan or home equity line of credit (HELOC). Borrowing against the equity in your home, as a lump sum or a revolving line. A HELOC is secured against the home like a mortgage, so the lender can move against the property if it isn’t repaid; HELOC rates covers what lenders charge and how much you can borrow.
- Car loan. The vehicle being bought secures the loan, and the lender can repossess it if payments stop. Car loan rates compares lenders.
- Car title or car equity loan. A loan against a car you already own; see car title loans for how they work and what they cost.
- Secured line of credit. A personal line of credit backed by an asset such as a home or investments, priced between a HELOC and an unsecured line; line of credit rates compares the two kinds.
- Savings- or GIC-secured loan. A loan backed by money you deposit with the lender, often used to build or rebuild credit, since the deposit covers the lender’s risk.
- Secured credit card. A card whose limit is backed by a cash deposit; if you don’t pay, the issuer can apply the deposit. Secured credit cards explains how they help build a credit history.
Types of unsecured debt
- Credit cards are the most widely held unsecured debt. If you stop paying, the issuer reports the missed payments, may pass the account to a collection agency, and can sue.
- Personal loans are usually unsecured; personal loan lenders compared covers where to borrow and how lenders decide.
- Unsecured lines of credit are revolving credit with no asset behind them, generally available only to borrowers with good credit.
- Government student loans are unsecured but have their own rules in bankruptcy and their own repayment help; see what happens if you can’t pay a student loan.
- Tax debt owed to the CRA is unsecured too, but the CRA can collect without first going to court; see what happens if you don’t pay the CRA.
How the cost compares
Collateral is the main reason rates differ so much between products. Each product’s current rates are on its own page:
| Product | Collateral | Current rates |
|---|---|---|
| Mortgage | Home | Mortgage rates |
| HELOC | Home | HELOC rates |
| Car loan | Vehicle | Car loan rates |
| Secured or unsecured line of credit | Varies, or none | Line of credit rates |
| Personal loan | Usually none | Personal loan lenders compared |
| Bad credit loan | Usually none | Bad credit loans, up to the 35% legal maximum |
| Payday loan | None | Payday loans and alternatives |
What happens if you stop paying
Secured debt. The lender can enforce its security. On a mortgage or HELOC that means power of sale or foreclosure, usually after a period in which you can catch up on the arrears; any money left after the debt and costs are paid goes to you, and a shortfall can remain your debt. On a car loan or title loan the lender repossesses the vehicle and usually sells it at auction; if the price is less than the balance, you can owe the deficiency. Provinces set notice and court rules for repossession that differ by province and by how much of the loan you have repaid.
Unsecured debt. The lender reports missed payments to the credit bureaus, may assign or sell the debt to a collection agency, and can sue. With a court judgment, it can ask for your wages to be garnished or for a lien on property. Our guides to your rights with debt collectors and wage garnishment cover each step.
When there isn’t enough money for every payment, the consequences above shape which bills come first: missing a secured payment can cost you the asset, while missing an unsecured one damages your credit first. Our guide to what to do when you can’t pay your bills sets out an order to work through.
In a consumer proposal or bankruptcy the two kinds of debt are treated differently: unsecured debts are dealt with by the proposal or the bankruptcy, while secured lenders keep their claim on the asset, so keeping a house or car means keeping up its payments. The consumer proposal and bankruptcy guide explains the rules, including which debts survive.
When a secured loan fits, and the risks
A secured loan suits a large amount, a lower rate or a borrower whose credit alone wouldn’t qualify, as long as losing the asset would be survivable. The risks are the other side of the same coin:
- Losing the collateral. Default can cost you the home, car or savings you pledged, and you may still owe a shortfall.
- Borrowing more than you need. Lower rates and larger limits make it easy to take on more debt than the original purpose required.
- Turning unsecured debt into secured debt. Paying off credit cards with a HELOC or a car title loan lowers the rate but puts an asset behind debt that wasn’t secured before, and the paid-off cards can fill up again. Our guide to debt consolidation weighs that trade-off.