What is the difference between "secured" and "unsecured" loans?

Secured loans are distinguished by the fact that they are backed by collateral. This means that the borrower pledges an asset—such as a house, car, or other property—against the loan. The lender has the right to take possession of the asset if the borrower defaults on the loan. This collateral reduces the lender's risk because they have a tangible asset to recoup their losses, which can lead to more favorable loan terms, such as lower interest rates.

In contrast, unsecured loans do not require any collateral. Because lenders cannot claim specific assets in the event of default, these loans are considered higher risk. This increased risk often results in higher interest rates for unsecured loans as lenders seek to compensate for the greater possibility of loss. Understanding the distinction between secured and unsecured loans is crucial for borrowers when making financial decisions, as it affects their creditworthiness, interest rates, and repayment terms.