A secured loan uses an asset you own as collateral to guarantee repayment. In exchange for pledging the collateral, borrowers access lower interest rates and larger loan amounts than unsecured credit allows. Understanding how secured loans work helps you make informed borrowing decisions — and understand the risks if repayment becomes difficult.
How Secured Loans Work
When you take out a secured loan:
- You offer collateral: A property, vehicle, investment, or other asset
- The lender registers a lien or charge: Against the collateral in the appropriate registry (land title, PPSA, etc.)
- You receive the funds: At a lower interest rate than unsecured lending
- You repay as agreed: Monthly payments of principal and interest
- The lien is released: When the loan is fully repaid
- If you default: The lender can seize and sell the collateral
The collateral gives the lender a legal claim over the asset — it reduces their risk, which is why rates are lower.
Types of Secured Loans in Canada
Mortgage
A mortgage is the most common secured loan — your home is the collateral. If you default, the lender can initiate foreclosure (in Alberta and BC) or power of sale (in Ontario and Atlantic Canada) to recover the debt. Mortgage rates are the lowest available in personal lending because real estate is stable, valuable collateral.
Home Equity Loan
A lump-sum loan secured against the equity in your home — the difference between your home’s market value and your outstanding mortgage balance. Often used for renovations, debt consolidation, or large expenses. Interest rates are typically prime + 1%–3%.
Home Equity Line of Credit (HELOC)
A revolving line of credit secured by home equity. You can draw, repay, and re-draw up to your limit. Interest is paid only on the outstanding balance. HELOCs are among the most cost-effective borrowing tools for homeowners — typically prime + 0.5%–1.0%.
Car Loan (Auto Loan)
Secured by the vehicle being purchased. If you stop paying, the lender repossesses the car. Car loan interest rates are typically 5%–10%+ depending on credit score and lender.
Car Title Loan / Car Equity Loan
Uses a vehicle you already own as collateral for a new loan. Higher risk and typically higher interest rates than standard auto loans. See our car title loans and car equity loans guides.
Secured Line of Credit
A personal line of credit backed by an asset (home, vehicle, investment portfolio). Lower rate than an unsecured line of credit but higher than a HELOC.
GIC-Secured Loan or Credit Card
Some financial institutions offer secured credit cards where a GIC is pledged as collateral. Used primarily by borrowers with poor or no credit history to build credit.
Secured vs Unsecured Loans: Interest Rate Comparison
| Loan Type | Typical Rate | Collateral |
|---|---|---|
| Mortgage (insured) | 4.0%–5.5% | Home |
| HELOC | Prime + 0.5%–1.0% (~6%–7%) | Home equity |
| Car loan (good credit) | 5.0%–8.0% | Vehicle |
| Personal line of credit (secured) | 7%–10% | Varies |
| Personal line of credit (unsecured) | 8%–12% | None |
| Personal loan (unsecured, good credit) | 9%–15% | None |
| Personal loan (bad credit) | 18%–30%+ | None |
What Happens to the Collateral If You Default
Secured lenders have the right to seize and liquidate collateral to recover the debt. The process differs by type:
Mortgage default: The lender initiates power of sale (Ontario, Atlantic provinces) or foreclosure (Alberta, BC) proceedings. You may have time to cure the default (repay arrears) before the property is sold. The sale proceeds pay the mortgage balance plus costs; any surplus goes to you. A shortfall remains your responsibility.
Car loan default: The lender repossesses the vehicle, often with minimal notice. They sell it (usually at auction). If the sale price is less than the outstanding balance, you owe the deficiency.
HELOC default: Treated similarly to a mortgage — lender can pursue power of sale or foreclosure.
When a Secured Loan Is the Right Choice
- You need a large amount: Secured loans allow larger borrowing amounts than unsecured
- You want the lowest rate possible: Collateral-backed rates are always lower than unsecured
- You have existing home equity: HELOCs and home equity loans are among the cheapest borrowing options for homeowners
- You are buying a vehicle or home: Auto loans and mortgages are the standard funding method
Risks to Understand Before Taking a Secured Loan
- Loss of collateral: Defaulting means losing your home, car, or other pledged asset
- Over-borrowing: Low rates and large limits can make it easy to borrow more than you should
- Debt consolidation trap: Using a HELOC to pay off credit card debt converts short-term unsecured debt to long-term secured debt — freeing card room can lead to re-accumulating card debt
Key Takeaways
- Secured loans use collateral to offer lower interest rates than unsecured credit
- Common types: mortgages, HELOCs, home equity loans, car loans, and GIC-secured cards
- If you default, the lender can seize and sell the collateral; you remain liable for any shortfall
- HELOCs are typically the lowest-cost form of secured borrowing for Canadian homeowners
- Secured loans make sense when the lower rate justifies the collateral risk
Related: Car Equity Loans Canada · Car Title Loans Canada · Best Personal Loans Canada · Personal Loans Hub