Want an unsecured loan? Find options here.

An unsecured loan is cash that is loaned to you without an underlying asset backing it up. In other words, the money isn’t lent to you on the condition you offer up your vehicle or your house as collateral, for example. The lender does not have something of yours to possess should you become unable to pay back the money.

Unsecured loans are usually reserved for those with better credit ratings and they require less paperwork, meaning you can get your loan quicker than if you had applied for a secured loan (which requires you to put up an asset as collateral).

The downside of unsecured loans is that, given the higher risk to the lender (remember, they won’t have an asset to take over if you can’t pay back the money), you’ll be charged a higher interest rate.

Unsecured loans come in two different varieties: personal lines of credit and personal loans.

Let's take a quick look at each.

Personal lines of credit: This is revolving credit that functions similar to a credit card, where you have a credit limit that renews each month and you never pay interest on the amount you don’t use.

Personal loans: These are a type of installment loan that you must pay back by a set day, and you must make regular payments until the full amount is repaid. Unlike lines of credit, you must decide how much money you want at the onset and when you’ve paid the amount owing, you are done with that loan. For example, if you borrow $5,000 and then pay it back, and you later need another $5,000, you’ll have to apply for a new loan.

In addition to these two types of loans, unsecured loans can either be fixed-rate or variable-rate. Here’s the difference between the two:

Fixed-rate: A fixed-rate loan means the interest rate on your loan stays the same until you have repaid it. The rates on these are typically higher than what you’d find on a variable-rate loan, though you eliminate the risk of your interest rate ever rising. The lender will work with you and price this rate based on a variety of factors, your credit score being the most important. The higher your credit score, the lower your interest rate will be.

Variable-rate: Unlike a fixed-rate loan, the interest rate on a variable-rate loan can change depending on market conditions. Variable loans will decline if the Bank of Canada lowers its key interest rate, however, they will rise if the central bank reverses its decision and raises interest rates. These loans are riskier than fixed-rate loans, with the tradeoff being that you initially get a lower interest rate and have the potential to see your monthly payments decline if interest rates go down.

An unsecured loan has two advantages over a secured loan: it requires less paperwork and approval for one is quicker. That means if you need the money immediately, an unsecured loan may be the answer for you.

Here are some situations that could require an unsecured loan:

• Home improvements or renovations.
• Tuition for school (especially since students might not have collateral for a secured loan).
• Consolidating debt (since personal loans have lower rates than credit cards).
• Buying a car (as unsecured loans can be quicker than using a secured loan).

Advantages

• Less paperwork than a secured loan
• Can be one of the quickest loans you can get
• Offers variable or fixed rates, giving you flexibility
• A lump-sum payment that can be used immediately
• No collateral required to obtain
• Lower interest rates than credit cards

Disadvantages

• Unsecured loans will have higher interest rates than secured loans.
• Require a higher credit score than secured loans.
• Are a lump sum payment: you will be charged interest whether you use the whole loan amount or not.

In Canada, unsecured loans are available through banks and alternative online lenders. You can get an online quote for an unsecured personal loan through LowestRates.ca to see what interest rates lenders online are willing to offer you. There’s no cost to you to get a quote with us and we keep your information secure.