Secured loans are less costly than unsecured loans because everfi……..
The Correct answer and Explanation is:
Secured loans are typically less costly than unsecured loans because they are backed by collateral, which reduces the lender’s risk. In contrast, unsecured loans lack collateral, making them riskier for lenders, resulting in higher interest rates.
Explanation:
Secured loans require the borrower to offer collateral—such as a home, car, or other valuable asset—against the loan. If the borrower defaults, the lender can seize the asset to recover their money. This significantly lowers the lender’s risk, allowing them to offer the loan at a lower interest rate. The most common types of secured loans include mortgages and auto loans. The lower interest rates and potentially better terms (e.g., longer repayment periods) are appealing to borrowers.
For example, when you take out a mortgage, the house you’re buying serves as collateral. If you fail to make payments, the lender can foreclose on the property to recoup their losses. The same principle applies to car loans—if you default, the lender can repossess the vehicle.
Unsecured loans, such as credit cards or personal loans, do not require collateral. Lenders rely on the borrower’s creditworthiness to determine their ability to repay the loan. Since there is no asset backing the loan, the risk to the lender is higher. To compensate for this increased risk, lenders charge higher interest rates, making unsecured loans more expensive for borrowers. Additionally, unsecured loans may have stricter eligibility criteria and shorter repayment terms.
In summary, secured loans offer lower costs because lenders have a way to recover their money if the borrower defaults. In contrast, unsecured loans come with higher interest rates because the lender has no collateral to rely on if the borrower fails to repay.