The primary keyword: types of loans Canada — understanding the different loan options Canada offers is key to making smart borrowing choices. This guide explains common loan types, how they work in Canada, and steps to choose and apply for the right option.
Quick overview: secured vs unsecured
Secured loans are backed by collateral (e.g., mortgage, HELOC, car loan). Lower interest, higher risk if you default.
Unsecured loans have no collateral (e.g., most personal loans, credit cards). Higher interest, but no direct asset at risk.
Common loan types in Canada
1. Mortgages
What it is: Long-term loans to buy a home. Can be fixed-rate or variable-rate, amortized over 15–30 years (common terms).
Key Canadian specifics: High-ratio mortgages (less than 20% down) usually require CMHC mortgage default insurance or other insurer coverage.
Useful link: For mortgage basics and protections, see the CMHC and FCAC mortgage pages: Canada Mortgage and Housing Corporation (CMHC) and FCAC – Mortgages.
Pros: Lower rates, large amounts, predictable monthly payments (fixed).
Cons: Long-term commitment, penalties for breaking some terms.
2. Home Equity Line of Credit (HELOC)
What it is: A revolving, secured line of credit against the equity in your home.
How it differs: Works like a credit card with a borrowing limit; interest-only payments are common during draw period.
Pros: Flexible access, lower rates than unsecured options.
Cons: Home is collateral — misuse can risk foreclosure.
3. Personal loans
What it is: Unsecured lump-sum loans used for many purposes (debt consolidation, major purchases, renovations).
Typical terms: 1–7 years, fixed monthly payments.
Pros: Predictable payments, no collateral.
Cons: Higher interest than secured loans; amounts usually smaller than mortgages.
4. Lines of credit (personal)
What it is: Revolving unsecured credit from a bank up to a preset limit.
Use cases: Ongoing expenses or emergency fund alternative.
Pros: Flexible, pay interest only on what you use.
Cons: Variable rates typically, can encourage overspending.
5. Auto loans
What it is: Secured loans specifically for vehicle purchases; the vehicle is collateral.
Terms: Often 3–7 years; dealer financing or bank/credit union loans.
Pros: Lower rate than unsecured loans.
Cons: Car can be repossessed if you default.
6. Student loans
What it is: Government-funded loans (federal and provincial) to help cover education costs.
Repayment: Varies by province; Canada Student Loans often offer income-based repayment assistance.
Useful link: For federal/provincial program details see Government of Canada — Student Loans.
Pros: Lower interest while in school or during grace periods; flexible repayment options.
Cons: Can accumulate interest and affect credit if unpaid.
7. Credit cards (revolving credit)
What it is: Short-term revolving credit with minimum payments and variable interest rates.
Pros: Convenience, rewards, purchase protections.
Cons: High interest rates if balance carried; can create long-term debt.
8. Payday loans and high-cost short-term loans
What it is: Small, short-term loans with very high fees and interest.
Warning: Extremely costly; usually a last resort.
Useful link: Learn risks and consumer protections at the FCAC payday loans page: FCAC — Payday Loans.
9. Business loans
What it is: Financing for small businesses or corporations (term loans, lines of credit, government-backed loans).
Programs: Federal/provincial supports exist for qualifying businesses (e.g., Canada Small Business Financing Program).
Personal loan vs line of credit — quick comparison
Purpose
Personal loan: best for one-time, planned expenses.
Line of credit: best for ongoing or unpredictable expenses.
Repayment
Personal loan: fixed monthly payments, definite end-date.
Line of credit: flexible payments, may lack fixed payoff date.
Interest
Personal loan: typically fixed rate or fixed schedule.
Line of credit: usually variable rate; can be lower if secured.
Risk
Both unsecured options pose less immediate asset risk than secured loans, but missed payments affect credit.
How interest rates in Canada affect loans
Bank of Canada policy rate influences prime rates that many lenders use for variable-rate loans and HELOCs.
Useful link: For current policy and rate guidance, see Bank of Canada.
Variable-rate products can get cheaper or costlier as the overnight rate changes.
How to choose the right loan — step-by-step
Define the purpose — one-time purchase vs ongoing need.
Estimate the amount and timeline — how much and how long to repay.
Check your credit score — obtain reports from TransUnion/Equifax.
Compare secured vs unsecured options — balance rate vs risk to assets.
Shop rates and fees — get quotes from banks, credit unions, online lenders.
Consider prepayment penalties and flexibility — important for future changes.
Read the fine print — fees, default terms, variable-rate triggers.
Apply and document — follow lender application steps (see checklist below).
Application checklist — what lenders typically want
Valid government ID.
Recent pay stubs or proof of income.
Employment letter or T4 slips.
Bank statements (chequing/savings).
Credit history (lender will pull report).
Proof of residence.
For mortgages: down payment proof, list of debts, property details.
Tips to reduce borrowing costs
Improve credit score (on-time payments, lower credit utilization).
Consider shorter terms for lower total interest.
Use secured loans only when necessary and you can manage the risk.
Refinance when rates drop—but watch for penalties.
Consolidate high-interest debts into a lower-rate personal loan or balance-transfer card.
Red flags and consumer protections
Avoid lenders that pressure you, ask for upfront fees, or guarantee approval regardless of credit.
Understand your rights under federal/provincial consumer protection laws.
For education on consumer protections and financial tools, visit the Financial Consumer Agency of Canada: FCAC — Consumer Protection.
Final checklist before signing
Confirm interest rate type (fixed vs variable).
Confirm amortization and monthly payment amount.
Check total interest cost and fees.
Understand default consequences (repossession, foreclosure).
Keep copies of all documents and communications.