Which statement correctly differentiates secured and unsecured loans?

Which statement correctly differentiates secured and unsecured loans?

• A. Secured loans have collateral; examples include a mortgage and an auto loan.
• B. Secured loans do not require collateral.
• C. Unsecured loans are typically backed by property.
• D. Unsecured loans have collateral; examples include a mortgage.

Answer: (D)

Collateral is the key idea. A secured loan is backed by an asset pledged to the lender, and if you don’t repay, the lender can seize that asset. Mortgages and auto loans are classic examples because the house or the car themselves act as collateral. Unsecured loans don’t pledge a specific asset; the lender relies on your credit history, income, and promise to repay. Since there’s no asset to seize, unsecured loans typically come with higher interest rates and stricter qualification standards. Common unsecured loans include many credit cards and personal loans. The statement that unsecured loans are backed by property mixes up how these work.

Collateral is the key idea. A secured loan is backed by an asset pledged to the lender, and if you don’t repay, the lender can seize that asset. Mortgages and auto loans are classic examples because the house or the car themselves act as collateral. Unsecured loans don’t pledge a specific asset; the lender relies on your credit history, income, and promise to repay. Since there’s no asset to seize, unsecured loans typically come with higher interest rates and stricter qualification standards. Common unsecured loans include many credit cards and personal loans. The statement that unsecured loans are backed by property mixes up how these work.