A loan is defined as giving something of value ranging from money or any other tangible material to another individual at a prescribed interest rate accompanied by the initial amount. It is typically evidenced by some documentation that outlines the terms that both parties have agreed on in terms of repayment and the repercussions that follow in any case the debt defaults. The document also contains the amount borrowed, the interest rate and the term period. Many loan agreements also highlight the grace period before the debt has to be paid and the maximum amount of interest that the debt can accrue.
In Canada, debts are often issued by private lenders, financial and banking institutions. These credit institutions are mostly involved in the lending industry so as to gain revenue from interest rates and contribute to the economic development of the country. Canadian credit facilities feature two main types of lending products including;
- Secured loans
- Unsecured loans
A secured loan is a debt which requires the borrower to provide some sort of collateral against it. When lenders give out debts, they take a significant risk in gambling on whether the principal amount will be repaid or not. Canadian credit facilities mitigate these risks by giving the borrower a provision of getting the debt against a valuable item that can reduce the risk of defaulting.
The collateral acts like insurance against the money borrowed in that it will only be useful if the borrower fails to pay the debt. Canadian lending institutions encourage the borrowers to pay the debt as the process of repossessing the item placed as collateral is costly and time-consuming. These loans are given after a thorough background check on the borrower’s credit history and income frequency. Types of secured loans are mortgage loans and auto loans.
Features of Secured loans
The features of secured loans in Canada include;
- High loan amounts due to risk mitigation using collateral.
- Reduced interest rates
An unsecured loan is one that is not supported by any collateral. The risk of this type of loan is not mitigated by anything other than the creditworthiness of the borrower. The risk associated with this type of loan is much higher which basically results in higher levels of security measures taken by the lender. Failure to pay an unsecured loan in Canada may lead to the borrower outsourcing the services of debt collectors or even going to court which will result in extreme debt retrieval measures.
The types of unsecured loans that most lending institutions in Canada issue include payday loans, credit cards, and student loans. They can be categorized as; term loans which the borrower repays in installments till the end of the loan period, or revolving loans which the borrower has a capped credit limit that can be spent and gotten again once the initial one is repaid.
Features Of unsecured debts
- Unsecured loans have very high-interest rates
- The loan amounts are lower due to the risk associated with the loan
- These loans are usually given out on a short term basis in Canada
Regardless of the flexible terms and regulations that have been put in place by these credit facilities, it is imperative for a borrower to ensure that payments are made as agreed. The penalties accrued by defaulting lead to a bad credit score and a myriad of other problems. The Canadian financial laws are present to ensure that both parties adhere to the set rules and regulations regarding secured and unsecured loans.