Secured Loan vs. Unsecured Loan: Key Differences and Examples

When considering a loan, it's important to understand the distinction between secured and unsecured loans. Secured loans are backed by collateral, meaning that you pledge an asset as security for the loan. If you default, the lender has the right to seize the asset to recover their money. Common examples of secured loans include mortgages and auto loans. For instance, when you take out a mortgage to buy a house, the house itself serves as collateral. If you fail to make your payments, the lender can foreclose on the property.

On the other hand, unsecured loans are not backed by any collateral. Instead, these loans are granted based on the borrower's creditworthiness and ability to repay. Because they are riskier for lenders, unsecured loans often come with higher interest rates. Examples of unsecured loans include credit cards and personal loans. For example, when you use a credit card, you are borrowing money based on your credit history and income. If you don't repay, the lender can't claim any of your assets but may take legal action to recover the debt.

Understanding these differences can help you make informed financial decisions and choose the type of loan that best suits your needs and financial situation.