If you are not able to make your mortgage payments the bank can cease your house. This is possible because such a loan is secured by collateral in the form of your house which can be sold and the money owing can be recovered. This collateral provides the lender with a sense of security, which makes it possible for you to take out a larger loan at a lower rate. But when there is no collateral and the only security the lender has is the creditworthiness of the borrower, the risk is higher.

An unsecured loan is simply a loan which is not backed by any collateral. And this means that you can’t borrow as much money as you would if you could provide collateral. Also, the interest rate you will have to pay on an unsecured loan will probably be a couple of points higher than what you are paying on your mortgage. The most barbaric form of unsecured loans is the so called pay day loan. If you factor in all the admin fees, etc., the total annualized interest on such a loan in BC may be as high as 600% and even higher. And I mean six hundred per cent - this is not a typo.

Surprisingly though, these loans are quite popular because they provide fast access to money for those who wouldn’t qualify for other forms of credit. An even more popular form of unsecured loans is a credit card. Access to this type of credit is most convenient because it is immediate and doesn’t require any paperwork at the time when the money is needed. The interest rates are not as exorbitant as with the pay day loans, but still very high.

There are many other forms of unsecured credit, including cell phone contracts, purchase financing plans offered by major stores, and many others. But the most client friendly unsecured loan is a line of credit you can get from your bank. If you have a good credit rating, stable income and a good relationship with your bank, your rate may be as low as prime and your limit may be high enough for any major purchase, including a nice car or a down payment on a house. However, as a general rule, secured loans provide higher borrowing limits at lower rates. This is why consumers often try to replace their unsecured credit with secured by using arrangements like home equity lines of credit (HELOC).

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.