What is true about a secured loan compared to an unsecured loan?

A secured loan is characterized by the requirement of collateral, which is an asset that the borrower pledges to the lender to back the loan. This collateral serves as security for the lender; in the event that the borrower defaults on the loan, the lender has the right to seize the collateral to recover the loan amount. Common examples of secured loans include mortgages and auto loans, where the property or vehicle serves as the collateral.

The presence of collateral typically lowers the risk for lenders, which can lead to more favorable terms for borrowers, including potentially lower interest rates. In contrast, unsecured loans do not require any collateral, making them riskier for lenders. Because they cannot reclaim any specific asset in the event of default, unsecured loans often come with higher interest rates to compensate for that additional risk.

Therefore, the statement that a secured loan requires collateral accurately reflects the fundamental difference between secured and unsecured loans.