Loans and Lines of Credit

Personal loans can be secured or unsecured. With a secured loan, you must offer some collateral (assets such as Canada Savings Bonds, non-registered investments or your house) as security for the loan. If you don't meet your loan obligations, the lender can seize the assets you offered as collateral. The interest rates generally are lower, making secured loans less expensive than unsecured loans.

An unsecured loan doesn't require any collateral. The financial institution can’t seize your property; however, you'll pay higher interest rates.

Sources of Loans

Shop around. Like any “product”, loans vary from one financial institution to another. Interest rates and the terms of the loan can be competitive. Ask questions about the terms of the loan. How long do you have to pay off the loan? Can you make extra payments or pay off the entire balance at any time without penalty? Negotiate. Most lenders negotiate on terms and interest rates. Banks and trust companies are competing with each other to get your business, so use this to your advantage.

The first place to go for a loan is the financial institution where you do your business. They know you and you know them and they may be willing to make a deal. If you belong to a credit union, see if loans are offered, as conditions and rates are similar to those of a bank or a trust company. You have to be a member of a credit union to borrow money. Try to avoid finance companies and instant cash loan companies, as they usually have the highest interest rates of all credit issuers.

Interest Charges on Loans

Depending on the purpose of the loan, interest charges may or may not be tax-deductible. Interest will be tax deductible if the loan is used to to purchase investments that can earn investment income, such as interest or dividends.For example:

  • Mutual funds, stocks or bonds
  • Rental property

Interest will not be tax deductible if the loan is used to:

  • To pay back your mortgage
  • To make RRSP or TFSA contributions
  • To purchase items of a personal nature
  • To consolidate debts

Lines of Credit

A line of credit is revolving credit extended to you by a financial institution. It works much the same as a credit card, with spending limits and minimum monthly payments. Interest rates are charged on the amount outstanding and are usually lower than credit card interest rates. A line of credit may be secured or unsecured.

A secured line of credit requires some collateral (assets such as Canada Savings Bonds, non-registered investments or your house) as security. If you don't pay back the line of credit, the lender can seize the property offered as collateral.

An unsecured line of credit doesn't require collateral. However, the interest rate will probably be higher than what you would pay on a secured line of credit.