What is the difference between secured and unsecured loans?

The distinction between secured and unsecured loans is fundamentally based on collateral. Secured loans are backed by an asset, meaning that the borrower pledges something of value (like a house or car) as collateral against the loan. This gives lenders a form of security; if the borrower fails to repay the loan, the lender has the right to seize the collateral to recover their losses. This added security typically leads to secured loans carrying lower interest rates due to the reduced risk for the lender.

On the other hand, unsecured loans do not require any collateral. They are based solely on the borrower’s creditworthiness and ability to repay. Since there is no backing asset to recoup losses from, unsecured loans usually come with higher interest rates to compensate for the greater risk faced by the lender.

Other options available in the question do not accurately describe this critical difference. For instance, while it's true that secured loans can have lower interest rates, this characteristic is a consequence of them being backed by collateral rather than the primary defining feature. Similarly, the requirement for a co-signer pertains to the borrower’s credit profile and is not inherently tied to whether the loan is secured or unsecured. Understanding this primary characteristic helps clarify the nature of both loan types.