Loans and other types of financing available to consumers generally fall into two main categories: secured debt and unsecured debt. The primary difference between the two is the presence or absence of collateral to protect the lender in case the borrower defaults.
Key Takeaways
- Secured debts are those for which the borrower puts up some asset to serve as collateral for the loan.
- The secured loans lower the amount of risk for lenders.
- Unsecured debt has no collateral backing.
- Lenders issue funds in an unsecured loan based solely on the borrowers creditworthiness and promise to repay.
- Because secured debt poses less risk to the lender, the interest rates on it are generally lower.
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Investopedia / Jessica Olah