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The different types of loans & lines of credit

March 2, 2023
5
min read

Should you take out a personal loan or a line of credit? To help you answer that, we’re clearing up the differences between them.

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Need to cover a big expense, but don’t have all the cash on hand? That’s what a loan is for; it’s a lump sum of money you borrow from a financial institution and pay back with interest.

You might borrow money to…

  • Purchase a car
  • Buy a home
  • Fund a renovation
  • Pay for post-secondary schooling
  • Or consolidate high-interest debt

Loans, lines of credit, and interest rates—there’s a lot to unpack before you borrow money.

Given the impact that a loan could have on your most important assets or your credit score, it’s not a choice to take lightly.

How do you choose the right loan for your financial situation? Each type has unique advantages and disadvantages.

To clear it all up, we’re comparing the different types of loans you can apply for:

What are the differences between secured and unsecured loans?

The main difference largely comes down to collateral.

Collateral is an asset of value, such as your vehicle or house.

With a secured loan, you must provide collateral to be approved.

If you don’t make your loan payments, this collateral can be taken away.

When you provide collateral, your financial institution may be willing to loan you more money at a lower interest rate. That’s because collateral makes your loan more secure.

With an unsecured loan, you aren’t required to provide an asset to borrow money—but you may pay higher interest rates. Since the loan isn’t secured by an asset, the lender takes on more risk, so you’ll need a higher credit score to be approved.

If you think you may be late on a loan payment or need to skip a payment, contact your branch as soon as possible or book a meeting to speak with a Cambrian Advisor.

Secured loan
Is collateral needed? Yes, you will be required to provide an asset to act as collateral. Generally, this will be a vehicle or your home.

What happens if you cannot make the payments? You may be charged fees and it could damage your credit rating. Eventually, you may lose your collateral.

Interest rate? Typically, the interest rate of a secured loan will be lower than an unsecured loan. If your credit score is too low to qualify for an unsecured loan, providing collateral might be a condition of approval.
Unsecured loan
Is collateral needed? No.

What happens if you cannot make the payments? You may need to pay late fees and it could damage your credit score.

Interest rate? Your interest rate and the amount you qualify for will be based solely on your credit score. This is a good option for those with a high credit score.

What are the differences between open-ended and close-ended loans?

What’s the next step in determining the right type of loan for you?

Figuring out how much (and how often) you need to borrow.

An  open-ended loan is one with a set limit that allows you to continually borrow money. It’s more commonly referred to as a line of credit or a revolving loan.

Close-ended loans are a one-time loan for a specific amount of money. You receive the funds from the loan and agree to repay the loan within a set period of time.

With a close-ended loan, you cannot increase the amount of money you borrow. To do that, you’d need to apply for a new loan.

Types of personal loans

As you’ve gathered by now, there isn’t just one type of loan—there are several different types.

The advantage of this is that you can get a loan that best fits your needs. You’ll just need to understand the differences between them first.

Here’s an overview of the different personal loans that most banks and credit unions offer:

Consolidation loans

Are you stuck with high-interest debt? Consolidating your debt can be a great way to pay off your debt at a lower rate.

With this type of loan, you can wrap all of your debt into one easy monthly payment and save money on interest.

Essentially, you take out a new loan from your financial institution and use it to pay off multiple sources of debt—for example, 3 credit cards with high interest rates.

Then, you pay back your consolidation loan at a lower interest rate over a set repayment period.

A consolidation loan can work in a few different ways:

You can opt to have the loan funds deposited into your chequing account, and then you would pay off your creditors directly.
Or, your financial institution could pay your creditors for you, saving you time and hassle.  

By consolidating your debt, you can…

  • Have a single monthly payment, which means you won’t have multiple due dates to remember.
  • Reduce the interest you pay on your credit card or payday loan debt. Debt consolidation can save you thousands of dollars in interest over the life of your loan.
  • Improve your credit rating by paying off your loan on a set schedule.

To see how much you can save on interest with a Cambrian PayOff Loan, try our PayOff Debt Calculator.

Car loans

If you’re purchasing a vehicle privately, be it a car, recreational vehicle, or boat, a car loan is a great option.

At Cambrian, we can finance auto loans of up to eight years in length. You can work with a Cambrian lending specialist to determine the amortization period for your car loan, and whether you’d prefer to make your payments weekly, bi-weekly, or monthly.

Home renovation loans

A home renovation loan is a convenient way to fund a large renovation. You can access all the funds you need at once and pay it back over time.

Compare the interest rate of a personal loan to that of a credit card, and you’ll see why this is a better option. Over time, you can save thousands of dollars through lower interest rates.

Types of lines of credit

With a line of credit, you have the freedom to create your own loan whenever you need it. Better yet, you’ll only pay interest on the amount you use.

At Cambrian, we offer two different lines of credit:

Personal line of credit

A personal line of credit is unsecured, which means you do not require collateral to get one. However, you’ll pay a higher interest rate than you would with a secured line of credit.

With a personal line of credit, you can access a certain amount of money whenever you need to, up to the limit set by your financial institution.

Your personal line of credit may have a fixed or variable interest rate. If it’s variable, it can increase or decrease over time.

In addition, the amount of money you can borrow for a personal line of credit is typically higher than with a credit card.

Home equity line of credit

A home equity line of credit (HELOC) allows you to take advantage of the equity built up in your home.

You can borrow up to 80% of your home’s value. On top of that, these funds are constantly available to you, so you can tap into them whenever you need them.

And as with all lines of credit, you only pay interest on the amount that you use.

Let’s talk about your loan options

Still not sure which loan option is right for you? That’s what our advisors are here for. We can help you refinance your debt, borrow money for a renovation, or simply talk about your options.

To speak to a Cambrian Advisor in Winnipeg or Selkirk about personal loans, book a meeting online today!

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*All rates and yields subject to change without notice.
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