Secured vs. Unsecured Equipment Loans Explained

If you're considering financing new equipment for your business, you've probably come across two terms: secured loan and unsecured loan.

But what do they mean?
And more importantly—how does it affect your approval, rates, or risk?

In Canada, most equipment loans are secured, meaning the lender holds a legal claim (called a lien) on the equipment itself. In some cases, however, you may qualify for unsecured financing—but often with stricter conditions or higher interest.

This guide will help you:

• Understand what collateral really means
• Compare secured vs. unsecured equipment loans
• Know what happens in default scenarios
• Make an informed financing decision with your eyes open

What Is Collateral in Equipment Financing?

Collateral is an asset pledged to a lender to secure repayment of a loan.

In equipment loans, the collateral is often the equipment itself—whether it’s a truck, excavator, oven, CNC machine, or laser system.

If you default (stop making payments), the lender has the legal right to repossess and sell the equipment to recover their losses.

This is why secured loans generally come with lower interest rates and higher approval odds.

Secured Equipment Loans: The Default in Canada

A secured equipment loan is the standard financing structure for most businesses. It’s structured like this:

• Equipment acts as collateral
• Loan is registered with a PPSA lien (Personal Property Security Act)
• You make fixed monthly payments over a set term
• You own the equipment outright (or at lease-end, in lease scenarios)

Advantages:

✅ Lower interest rates (because risk is reduced for the lender)
✅ Easier approval—even for newer businesses
✅ Larger loan limits
✅ Flexible terms (up to 84 months)

Considerations:

• Lender places a lien on the asset
• If you default, equipment can be repossessed
• You must maintain insurance and asset condition

Unsecured Equipment Loans: When Are They Used?

Unsecured loans are not tied to a specific asset. These are rare in equipment financing—but can be an option if:

• You’re financing a small amount (typically under $50,000)
• You have very strong business and personal credit
• You’re seeking fast, short-term funding for general use
• You want to avoid asset liens due to existing lender relationships

Advantages:

✅ No lien or collateral required
✅ No risk of losing equipment if you default
✅ May be quicker to fund

Trade-offs:

🚫 Higher interest rates (often 12%–25%)
🚫 Shorter terms (12–24 months)
🚫 Smaller loan sizes
🚫 Stricter personal guarantees or credit score requirements

Explore: Working Capital & Credit Lines

Secured vs. Unsecured Equipment Loan Comparison

What Happens If You Default?

Understanding default outcomes is part of being a responsible borrower.

With a secured loan:

• The lender can legally repossess the equipment
• You may still owe any shortfall if resale doesn’t cover the balance
• Your credit may be impacted by missed payments or legal collection

With an unsecured loan:

• The lender cannot seize specific equipment
• You’re still personally liable if a guarantee was signed
• Legal action or credit damage may occur

The best way to avoid this? Structure financing with terms that match your business’s cash flow.

Explore: Speak to a Credit Analyst

Real Case Study: Equipment Financing with & without Collateral

Scenario A: Restaurant owner in Toronto leasing a new $45,000 walk-in freezer

• Used secured lease (equipment as collateral)
• Term: 60 months, 9.5% fixed rate
• Equipment fully insured
• Buyout: $10 at term end

Scenario B: Marketing agency owner needed $25,000 for office upgrades

• No asset available for collateral
• Used unsecured short-term loan
• Term: 18 months, 18.9% interest
• Higher monthly payment, but faster process

Lesson: Both options worked—but the secured lease had lower cost and more flexibility.

FAQs: Collateral and Equipment Financing

Do I lose ownership with a secured loan?
No—you own the equipment (unless it’s a lease). The lender just holds a legal interest (lien) until the loan is paid off.

Can I finance equipment without collateral at all?
Yes, but expect stricter terms and possibly higher rates. This is more common for working capital than large equipment.

Can I use additional collateral to improve my terms?
Yes. Offering additional assets (vehicles, real estate) may reduce your rate or improve approval odds in some deals.

Can I get the lien removed early?
Once the loan is paid off or refinanced, the lender removes the lien. This is usually automatic, but you can request confirmation.

Final Word: Know What You’re Signing—and Why

Secured loans are the most common tool for equipment financing for a reason: they’re accessible, lower-cost, and flexible.

But understanding how collateral works—what’s at stake, and what’s not—helps you make smart, informed decisions.

At Mehmi, we believe in transparent, structured equipment financing that supports growth while protecting your business.

Need help choosing between secured or unsecured options?
Talk to a credit analyst or use our calculator to compare payment options in real time.

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