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

The distinction between secured and unsecured loans primarily revolves around the presence or absence of collateral. A secured loan is one that is backed by some form of collateral, which is an asset that the lender can seize if the borrower fails to repay the loan. This might include property, vehicles, or other valuable assets. Because the lender has this assurance, secured loans often come with lower interest rates and more favorable terms compared to unsecured loans.

In contrast, unsecured loans do not require collateral. Instead, they are issued based solely on the borrower’s creditworthiness and ability to repay the loan. Lenders assess the borrower's credit history, income, and financial stability to determine the risk of default. Due to this higher level of risk, unsecured loans typically carry higher interest rates.

Understanding this difference is crucial for borrowers as it influences not only their eligibility for loans but also the terms they can expect, including interest rates and repayment obligations.