List of Collateral Loans in Canada

WOWA Simply Know Your Options

Chances are, you already understand what a collateral loan is. Otherwise known as a secured loan, these lending products reduce lender risk by pledging an asset they can collect for missing payments. As a result, securing your loan is the secret to a low interest rate.

The most common type of secured loan is a mortgage. For example, your mortgage is collateralized by your home, and the lender has a lien on your title. Missing mortgage payments result in the lender either possessing your home through a foreclosure procedure or selling it through a power of sale process.

In reality, there are many types of secured loans with collateral ranging from cars to jewelry or artwork. However, the asset you are collateralising will affect the features of your loan. For example, to get the best interest rate, you’ll need either a fungible asset (like government bonds) or an immovable asset (like real estate) that’s easy to sell and won’t sharply drop in value.

You can collateralize many types of assets with a secured loan. Continue reading to learn everything about collateral loans and the options you have.

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Advantages

• Lower Interest rates: Since the lender has reduced risk with a collateralized loan, they are willing to offer lower interest rates.
• Larger loan size: The lender will also offer higher loan amounts due to the reduced risk.
• Longer term lengths: Allows you to reduce your monthly payment by spreading it over a more extended period.

Disadvantages

• Potential loss of asset: If you default on payments and cannot repay your debt, the lender may repossess your collateralized asset.
• More steps in application: It may take longer to get a secured loan because of additional steps, such as verifying the value of your collateral.
• Margin call: It's risky to collateralize assets that frequently change in value, such as stocks. If the value rapidly decreases and your loan's LTV goes over the maximum loan-to-value allowed, you may have to repay some of the loan.

Lenders generally reward you with more favourable loan terms for collateralizing a safer asset. An asset is deemed safer if it's easy to sell, less mobile, and won't sharply drop in value. For this reason, collateralizing your home will almost always have the best lending conditions.

Lending conditions are the characteristics of your loan, such as your interest rate, loan-to-value, and term length. Collateralizing safer assets entitles you to a lower interest rate, higher loan-to-value, and extended term length. Riskier assets have the following loan characteristics;

• Higher interest rates to compensate for more risk.
• Shorter term lengths, so lenders get their money back faster.
• Lower LTVs as a lender safety cushion if they need to sell and get their money back.

The remainder of this section will walk you through the six main types of secured loans and explain them in detail.

Mortgages

• Interest rate: 5% - 9%
• Credit score: 620+
• Loan amount: $100,000 - $1,000,000
• Term Length: 15 - 30 years

A mortgage is the most common type of collateral. It's Canada's most popular way to finance a home purchase. A mortgage is secured against your property, which means that if you don't make monthly payments, the lender can repossess your home through a power of sale process.

During the mortgage approval process, lenders will thoroughly assess the home to ensure it's good collateral. This includes an appraisal, title search, and insurance. As a result, the application process is more complex, and it can take a while to get approved.

The mortgage lender will become the primary lien on your home. This means they have the first claim on your home if you default on your mortgage payments and need to sell the property. However, since a house is easy to sell, immovable, and won't rapidly drop in price, lenders deem it not risky. As a result, you'll get the lowest interest rates when collateralizing the first lien of your primary residence. If you already own a home and want to borrow against it, you can use a cash-out refinance.

Tip: What is home equity?

Home equity is how much of the home you own. It is the difference between the market value and the total amount borrowed against the house. Most likely, your home equity will increase over time due to paying off your mortgage and increases in the home value. You can borrow against it using a variety of secured loans.

Second Mortgages

• Interest rate: 6% - 10%
• Credit score: 620+
• Loan amount: $10,000 - $250,000
• Term Length: 5 - 30 years

While a mortgage is a primary lien on your home equity, many products let you borrow on the remaining home equity. These are second mortgages because in the event of default, these lenders get their money after the primary lender is paid. As a result, these tend to have slightly higher interest rates than a mortgage. The most popular second mortgages include:

• Home Equity Line of Credit: The most flexible way for homeowners to borrow money. A HELOC provides you with a limit on which you can borrow and repay as needed. You will only need to pay interest on the borrowed amount. Most HELOCs have variable interest rates that can rise or fall depending on the Prime Rate.
• Home Equity Loan: Provides predictability over flexibility. You’ll receive a lump-sum amount up front and will have to start paying interest on the complete borrowed amount immediately. Home equity loans have fixed interest rates resulting in predictable monthly payments.
• Reverse Mortgage: The most unique option for homeowners exceeding 55. Lenders will provide lump-sum or monthly payments that you won’t need to pay back until you move out of your home, sell it or the last borrower dies. However, reverse mortgage interest rates tend to be higher than the alternatives.

Auto Loans

• Interest rate: 7% - 35%
• Credit score: Dependent on loan type
• Loan amount: $10,000-$100,000
• Term Length: 1 month - 7 years

If you own a car, you can secure an auto loan against it. Auto loans are typically the shortest term of all collateralized loans and come with higher interest rates. This is because it's riskier for lenders to secure a car since it can drive away. Borrowers may only need to make payments for up to five years before owning the car outright.

Your credit score and vehicle model will be essential in determining the interest rate you qualify for. Additionally, lenders may also look at your debt service ratios, which compares your debt with your total income. There are two main types of auto loans.

• Car Loan: The standard loan used to buy a car you don't own. You can use this loan to buy a car from a dealer or a private seller.
• Car Title Loan: Allows you to borrow against cars you already own. These typically have very high interest rates with annual percentage rates (APRs) exceeding 30%. If you have an existing car loan, you might still be able to borrow more money with a car equity loan.

Boutique Secured Loans

• Interest rate: 5% - 30%
• Credit score: No minimum requirement
• Loan amount: $1,000 - $1,000,000
• Term Length: 1 - 5 years

High-net-worth individuals with access to private banking can collateralize many personal assets. Boutique securitized loans will let you borrow against items such as:

• Artwork
• Jewelry
• Investments
• Life Insurance Policy
• Vehicles (Boats & Planes)

However, in many cases, these assets are difficult to value and have high appraisal fees. Additionally, these assets are risky for lenders translating to less favourable loan characteristics. Unlike homes, these assets are portable, difficult to sell, and have the potential to drop rapidly in value. Lenders will offer lower LTVs, shorter term lengths, and higher interest rates to compensate for the increased risk.

Some boutique lenders may even allow you to cross-collateralize assets. Instead of using one asset per loan, you can secure multiple loans with a bundle of various assets. For example, you could use some of your artwork as additional collateral for a loan against your investments. However, this means you are taking on more risk because lenders can seize multiple assets in the event of default.

Secured Business Loan

• Interest rate: 7% - 30%
• Credit score: No minimum requirement
• Loan amount: $5,000 - $500,000
• Term Length: 1 - 5 years

While individuals can collateralize personal items, businesses can do the same with commercial items. Companies can use a variety of assets as collateral for a loan, including:

• Real estate: Can include commercial or residential properties, land, or other real estate assets.
• Equipment: Businesses may use equipment such as machinery, vehicles, or other assets as collateral for a loan.
• Inventory: In some cases, businesses can use their inventory as collateral for a loan. This can include raw materials, finished goods, or other types of inventory.
• Accounts receivable: Businesses can also use accounts receivable, or the money owed to the business by its customers, as collateral for a loan.
• Securities: Securities such as stocks, bonds, and other financial instruments can be used as collateral for a loan.
• Intellectual property: In some cases, businesses may use intellectual property such as patents, trademarks, or copyrights as collateral for a loan.

Famously, Ford collateralized their logo in 2006 for a $23.5 billion loan to avoid bankruptcy. This also included the trademarks for the Mustang sports car and F-150 pickup. Note that securities and intellectual property collateralization are typically reserved for larger businesses. This is due to the high costs required to value the assets.

Secured Credit Card

• Interest rate: 19.99%
• Credit score: No minimum requirement
• Loan amount: $500 - $5,000
• Term Length: N/A

Otherwise known as a credit builder loan, these are the safest option for lenders. This is because you typically secure the card with a cash deposit, ensuring that lenders are protected if you default on your loan.

In most cases, the card has a 0% loan to value, meaning the lender doesn't provide you with any of their money. For example, if you deposit $1,000, this would become your credit limit. Any late payments are charged at a standard APR of 19.99%.

This means you are lending to yourself but paying interest to someone else. You can receive your deposit back by closing the account or switching your card to an unsecured variant.

The main benefit of a secured credit card is that it helps you kick start building a credit score. This can be particularly useful if you have a low income or have yet to be able to establish credit.

The requirements for secured loans will vary depending on the lender and the type of asset you use as collateral. However, there are some basic requirements, such as government identification and exceeding the age of the majority. In addition, lenders will assess your application using three categories.

Credit score plays an integral role in the secured loan application process. It is used to assess a borrower's creditworthiness and ability to repay the loan over its term. Generally, lenders will require a minimum credit score for approval. With a higher credit score, you appear to be a safer borrower. As a result, you’ll likely receive lower interest rates and higher LTVs.

The collateral you offer as security for the loan is also essential in determining your approval eligibility. Typically, secured loans will require some property or asset that can be liquidated in the event of default, including real estate, vehicles, or other physical assets. You will receive a higher LTV if the collateral is not portable, and easy to sell.

Lenders will also assess your ability to make repayments on the loan. This means examining your credit history and evaluating your current income and expenses. Sometimes, you may need to provide proof of employment or a letter from your employer detailing your income.

You should now understand what type of secured loan you are looking for. This section will explain your options on where to find them.

These lenders have the most challenging qualification process and the least flexible options. They typically offer low LTVs and charge higher interest rates. However, they offer some of the most secure terms compared to other lenders. Banks are the toughest lenders to receive funding from.

These lenders are popular alternatives for borrowers who want a fast approval process and more accessible qualifications. Online lenders often offer lower loan-to-value ratios and lower interest rates, though their terms may not be as secure as those of a bank.

Credit unions are nonprofit organizations that provide financial services to their members. They offer some of the lowest interest rates and often have flexible terms for borrowers depending on your creditworthiness.