What is a secured loan? Question 3Answer a. A loan that requires a co-signer. b. A loan with a guaranteed fixed interest rate. c. A loan backed by collateral. d. A loan based on trust, with no collateral.
The correct answer and explanation is:
Correct Answer: c. A loan backed by collateral.
Explanation:
A secured loan is a type of loan that is protected by an asset or collateral. When a borrower takes out a secured loan, they agree to give the lender a legal claim to a specific asset (like a house, car, or savings account) if they fail to repay the loan. This collateral reduces the lender’s risk because they can seize and sell the asset to recover their money in case of default.
Examples of secured loans include mortgages, where the house is the collateral, and auto loans, where the vehicle is the collateral. Because the lender has this added protection, secured loans often come with lower interest rates, higher borrowing limits, and longer repayment terms compared to unsecured loans.
In contrast, unsecured loans (such as personal loans or credit cards) are not backed by collateral. These loans are granted based on the borrower’s creditworthiness, which includes factors like credit score, income, and repayment history. Because they pose more risk to the lender, unsecured loans usually come with higher interest rates.
Collateral can vary depending on the type of loan and the lender’s requirements. For example:
- Savings-secured loans use a savings account as collateral.
- Car title loans use the title of a vehicle.
- Home equity loans use the equity in a home.
Defaulting on a secured loan can lead to the loss of the asset, which is a major risk for the borrower. Therefore, while secured loans can be a good way to borrow money at favorable terms, borrowers should only agree to one if they are confident in their ability to repay it.
In summary, a secured loan is backed by collateral, offering protection to the lender and often better terms to the borrower.