Loans 101: Understanding Various Types of Loans


If you lack the financial resources you need to meet a particular obligation, be it house repair, paying down an upcoming mortgage installment, settling an overdue credit card bill, or booking a vacation, you’ll most likely look to get a loan.

But what type of loan should you seek – do you really know? Let’s explain what types of loans are available to you, and how each one works.

The Loan Universe

At a very basic level, loans can be qualified based on:

  • The purpose for which you need the money: For instance, Mortgage Loans can be tapped into when purchasing property or equipment (Home or Factory equipment)
  • The length of period for which the money is required: Depending on whether you need the money for a few days, or for a few years, you could get a loan to suite your time horizon
  • The amount of money you need: There are loans that are limited to no more than a few hundred dollars (like Pay Day loans), to loans that span thousands (Line of Credit Loans), or even hundreds of thousands of dollars (like a Home Equity Loan)
  • Interest rates charged: Depending on how much of a risk the lender sees you as, you could be charged an extremely high rate of interest (e.g. for Unsecured Loans), or a relatively reasonable interest rate (for Secured Loans)

Now that we understand the broad universe of loans, lets take a closer look at some of the more popular types of loans that Canadians can tap into.

Types of Loans

Canadians in need of financing have a number of loan vehicles available to them. Depending on what you need the money for, and for how long, you could access any of the following types of loans:

Types of Loans

  • Personal Loans

As their name suggests, these are loans that you might use towards payments that are “personal” in nature. Unlike a down-payment for a house, or an installment for a car, these loans are often sought to bridge a temporary cash-flow gap.

The amount borrowed is usually small – perhaps ranging from a hundred dollars to less than a thousand. The duration of personal loans is also usually short – from a few weeks to a few months. Personal Loans can be:

  1. Unsecured: Where you don’t need to provide any collateral (security) to qualify for the loan
  2. Secured: In which case the loan is “back stopped” by some form of security, in the form of personal surety or collateral

If you are applying for an Unsecured Personal Loan, because the lender doesn’t have any “surety”, they may charge you a higher rate of interest. In both cases however, Secured and Unsecured, you may need to undergo a credit check, and you’ll need to agree to a repayment schedule. Personal loans are usually spent at the discretion of the borrower. See what personal loan offers you can get.

(Check out our previous article “How to Get a Loan – The Quick and Easy Way“)

  • Pay Day Loans

In some emergency situations, for instance when a paycheque is delayed for some reason, you could turn to borrowing against a Pay Day Loan. These loans often have ultra-high interest rates, but they can be accessed in record time – usually within 24-hours!

While some lenders might insist on a credit check, almost all Pay Day Loan lenders will require to see proof of employment – pay cheques or letters of employment. This type of financing is great in cases where you are in a cash-crunch. But because they carry extremely high interest rates, they shouldn’t be used as a long-term solution to your cash flow problems.

  • Line of Credit Loans

Banks (and Credit card issuers) often approve their credit-worthy clients for a Line of Credit (LoC), against which money can be drawn at will. This means that, if you are approved for a $10,000 LoC, you can borrow up to $10k on a rolling basis. If you borrow $3,000, you’ll still have a LoC balance of $7,000 to tap into. Once you repay the 3K you borrowed earlier, your LoC goes back up to 10K.

If your loan needs are of an on-going nature, such as continually paying for an 8-month home renovation project, then a LoC loan might be right for you. While (in the example above) you are approved for $10,000, you’ll only pay interest on the amount that you “use up” (in this case $3,000).

As in the case of secured/unsecured Personal Loans, LoC loans can be secured or un-secured. The former will result in loans bearing lower interest rates compared to the latter.

  • Home Equity Loans

If your home is worth, say, $400,000, and you only owe a mortgage of (say) $50,000 against it, that means you have built up $350,000 equity in your home. A Home Equity Loan allows you to tap up to that amount of equity ($350K – subject to deductions for financing/ administrative expenses and adjustments) as a loan value.

Home Equity Loans are often called “second mortgages” and are secured against the value of your home. However, contrary to the name “Home” in the title of the loan, the amount borrowed can be used at your discretion – including any “non-home related” purposes.

The advantage to this type of a loan is that it gives you access to larger amounts of financing at lower interest rates (since the loan is secured), and you may find it less cumbersome to get approved. The risk of not repaying a Home Equity Loan is that the lender could potentially seize your home!

Borrowing Responsibly

Canadians have racked up personal debt at the highest level in decades. According to some reports, while it continues to improve, our debt-to-household-income ratio is above 170% – meaning, for every $100 earned, the average Canadian owes $170+! A lot of that debt ($8,539.50 to be specific) is non-mortgage related – which means we are borrowing to spend, and not to build equity or wealth!

The type of loan you choose to fund your lifestyle will have a great impact on those statistics just cited. Use the information provided above to choose your loan vehicle wisely. For instance, it may be unwise to take on an Unsecured Personal Loan, at 19% interest, to pay down a Line of Credit loan, for which you are paying 9%!

Additionally, higher-interest loans, such as Pay Day Loans, should only be used for emergencies, and as a last resort. That’s because they are often due within a very short period (days/weeks). Failure to repay them in full puts you in greater risk of damaging your credit score.


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Nilay Lad

Nilay Lad

Co-founder, Advisor & Guest Blogger

Nilay holds 14+ years of experience in developing and delivering strategies to grow and digitise banks through proposition development and improving customer experience.

This information is just our view and should be not be considered advice of any sorts.
From our experience and other professionals we partner and engage with, we work to find useful tips and information that would be important to share.
If you are someone that is looking for professional advice tailored to your circumstance, please contact a bank, financial advisor, or mortgage broker.