Financial institutions in Canada offer different types of loans, from personal and student to auto, boat, business, and others.
Secured vs. Unsecured
Banks, credit unions, and other establishments offer secured loans and require that borrowers pledge real estate or a valuable item as collateral. This can be jewelry, antiques, vehicles or anything else of value. The main benefit for borrowers is the attractive interest rate compared to unsecured loans. The reason is that they take more risk – their property can be repossessed by the financial institution if they are unable to make timely payments. Thus secured debt is less risky for financial institutions. Unsecured loans are offered to borrowers with an excellent credit score who are considered trustworthy. Banks take more risk in granting unsecured loans and hence, they offer higher interest rates.
Closed-ended vs. Open-ended
Open-ended loans are a form of revolving credit meaning that the borrower can draw on the line multiple times. Home equity lines of credit and credit cards are two examples. They are offered with different purchase limits depending on the borrower’s income level, credit history, and other factors. Credit cards also have an interest-free period during which interest is not charged. Unlike them, closed-ended loans are in the form of a lump sum to be used for different purposes – to finance the purchase of real estate, vehicle, or furniture, to pay tuition or board, go on vacation, etc. Customers cannot borrow over and over but only after the loan has been paid off. There are different types, including auto, personal, and student loans as well as mortgages.
Personal vs. Business
Government vs. Private Loans
Government loans are offered by agencies and departments to students, farmers, small businesses, and other applicants. Private loans are extended by banks, finance companies, and other establishments. They feature subsidized interest rates. Financing is offered to help applicants from different sectors to improve used equipment, make renovations, and more.
Common Bank Loans
Banks offer short- and long-term financing to businesses. Money used as working capital and for accounts payable is an example of the former. Long-term financing is used to expand, improve, and buy assets such as equipment, land, facilities, real estate, plants, warehouses, and others. As a rule, long-term loans are backed by collateral in the form of a major asset. Short-term loans are usually repaid within a period of 1 to 3 years. However, banks usually require collateral when the applicant is a start-up business. The collateral can be in the form of a fixed asset, inventory, or accounts receivable. Common loans offered to individual borrowers are new and used auto loans and student loans.
Loans with High Interest Rates
Some loans are best to be avoided, including advance fee and payday loans. Payday lenders offer short-term loans with an extremely high interest rate. The borrower’s next paycheck guarantees repayment. Advance fee loans are actually a type of scam. Con artists convince borrowers to pay a fee to get financing. They disappear once the fee is wired.