A secured line of credit requires collateral, which usually means a lower interest rate and higher limit, while an unsecured line of credit relies on your creditworthiness and carries more risk for the lender and often a higher rate for you. The right choice depends on whether you have assets to pledge and how much risk you can tolerate.
A secured line of credit is backed by an asset the lender can seize if you default, while an unsecured line of credit is not tied to a specific asset and relies mainly on your creditworthiness. That single difference affects how much you can borrow, the interest rate you may be offered, and what is at stake if your finances change.
| Feature | Secured line of credit | Unsecured line of credit |
|---|---|---|
| Collateral | Requires an asset, such as home equity or investments | No specific asset pledged |
| Typical rate relationship | Often lower because the lender has security | Often higher because the lender takes more risk |
| Credit limit | May be higher, tied to asset value | Usually lower, tied to income and credit history |
| Approval focus | Asset value, equity, and ability to repay | Credit score, income, debts, and repayment history |
| Risk if you default | Lender can seize and sell the collateral | Lender can sue, garnish wages, and report to credit bureaus |
How collateral changes the lender's risk
Collateral is an asset you pledge to secure a debt. If you stop paying, the lender can take legal steps to seize and sell that asset to recover what you owe. Common examples include home equity, investment accounts, and savings. A home equity line of credit (HELOC) is the most familiar secured line in Canada because the lender registers a charge against your home. Because the lender has a fallback, it may offer a lower interest rate and a larger limit than it would on an unsecured line. The lender is not being generous; it is pricing the reduced risk of loss.
An unsecured line of credit has no specific asset behind it. The lender relies on your contract, your credit history, and the legal system if you default. That is why unsecured lines often carry higher interest rates and lower limits. The lender may also review your account more often or reduce the limit if your credit profile changes. Both secured and unsecured lines are subject to federal and provincial consumer protection rules. The Financial Consumer Agency of Canada's loans resources explain the general rights and responsibilities that come with borrowing.
Rates, limits, and how lenders decide
Interest rates on lines of credit are usually variable. They are often described as prime plus or minus a spread. The prime rate moves with the Bank of Canada's policy interest rate, though lenders set their own prime rates. A secured line may be priced at a smaller spread over prime because the collateral reduces the lender's risk. An unsecured line may be priced at a larger spread. Rates vary by lender and province, so no single rate applies across the country.
Your credit history matters for both products. The FCAC's credit reports and scores guide explains how late payments, high balances, and defaults can affect your score. A stronger score can help you qualify for better terms, but it does not remove the extra risk an unsecured lender takes. Lenders also look at income, employment, debt-to-income ratios, and how much equity you have in the asset. For a secured line, the limit is often tied to a percentage of the asset's value minus any existing debts secured by it. For an unsecured line, the limit is usually based on income and credit, and it may be much lower.
What happens if you default
Default consequences differ sharply. With a secured line, the lender can seize the collateral. If the collateral is your home, that can lead to a power of sale or foreclosure, depending on the province. The lender may sell the asset and use the proceeds to pay the debt. If the sale does not cover what you owe, you may still owe the shortfall. You could also lose an investment account or savings that you pledged.
With an unsecured line, the lender cannot simply take a specific asset. It can send the account to collections, sue you, and seek a judgment. In many provinces, a judgment can lead to wage garnishment or a lien on property. Both types of default can damage your credit score and stay on your credit report for years. The lender can also demand immediate repayment of the full balance, which is called calling the loan.
Canadian law sets an outer limit on interest. The federal criminal interest rate is 35% per annum under section 347 of the Criminal Code and the Criminal Interest Rate Regulations (SOR/2024-114). You can read the Criminal Code section 347 for the legal text. Most lines of credit are well below that cap, but it is a useful backstop to know. Payday loans are treated separately and are capped by provincial rules. Ontario's cap is $14 per $100 advanced under O. Reg. 475/24, and British Columbia's cap is 14% of the principal under B.C. Reg. 57/2009. For any other province, see the regulator's current published figure.
Co-signing a line of credit
If you co-sign a line of credit, you are promising to repay if the primary borrower does not. That can apply to both secured and unsecured lines. On a secured line, the co-signer may be asked to pledge an asset or may simply guarantee the debt. Either way, the risk is real. Federal rules require lenders to disclose certain information to joint borrowers. The FCAC's page on disclosure to joint borrowers explains what you should receive. Before agreeing, read our guide on what it means to be a co-signer and consider whether you can afford the payments if the other person stops paying.
Common mistakes to avoid
- Borrowing the full limit just because the lender approved it. A line of credit is a tool, not extra income.
- Using an unsecured line for long-term debt. Variable rates can rise, and minimum payments may not reduce the balance quickly.
- Forgetting that a secured line puts a specific asset at risk. If you pledge your home, you could lose it.
- Co-signing without understanding that you are fully liable. The lender can pursue you without first exhausting all options against the primary borrower.
- Assuming the rate is fixed. Most lines of credit have variable rates, so your payment can change when prime changes.
- Ignoring the terms. Read the agreement for fees, prepayment rules, and what triggers a demand for repayment.
- Missing a payment. Even one missed payment can raise your rate or cause the lender to reduce or cancel the line.
Who this suits
- A secured line may suit homeowners with equity who need a larger limit, expect to carry a balance, and can manage the risk of losing the collateral.
- An unsecured line may suit borrowers without assets to pledge, those who need a smaller limit, or those who want to avoid putting a home or investment at risk.
- Co-signing may suit a family member who can afford to repay the debt and fully understands the legal liability. It is not a favour to take lightly.
- If your credit is damaged, compare options carefully. Our guide to bad credit loans in Canada explains how lenders assess risk and what alternatives may exist.
- Use a loan payment calculator to see how different rates and balances affect your monthly cost before you sign.