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Secured versus Unsecured Lines of Credit in Ontario

16 July 2012

When you need extra cash you might be thinking about a line of credit. Lines of credit are revolving loans that work just like a credit card; but there are two different types – secured and unsecured. The one you choose will depend on what your needs are, and what requirements you can fill for either.

An unsecured line of credit is one in which the borrower puts up no collateral for the loan. You’ll need to have a good credit rating (it will need to be very good to obtain an unsecured line of credit; and you’ll also need to show that you have a good payment history. You won’t need to put up any collateral on the loan and therefore, the lender will essentially have no recourse aside from collections should you default on the loan. Because of this, the lender is holding nearly all of the risk with unsecured lines of credit and to make up for that risk, they’ll most likely charge you a higher interest rate on your loan. Also because of the risk to the lender, you likely won’t be approved for as much money as you would be if you were to take out a secured line of credit.

A secured line of credit is one that is “secured” with some form of collateral, typically a property that already has some value built up into it. This is the case with certain mortgages in Ontario that are called HELOCs, or home equity lines of credit. These loans will allow you to borrow up to 80 per cent of the equity on your home, according to the new rules that just went into effect this month. Because these loans are secured with your own property, you can typically borrow more funds, and the variable rate that you’ll pay will be much lower than that on an unsecured line of credit.

When you’re deciding whether or not an unsecured or a secured line of credit is right for you, you must consider whether or not you have home equity to secure the loan. If so, this will definitely be the cheapest and the easiest way to get the money you need. If you don’t have home equity, an unsecured line of credit may be the way you need to go. Just beware that you should only use this route if you don’t have any other option, as it’s the one that will be the most costly to you.

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