What type of loan is backed by collateral?

A secured loan is a type of loan that is backed by collateral, which is an asset that the borrower offers to the lender as a guarantee against the loan. This means that if the borrower fails to repay the loan, the lender has the right to seize the collateral to recover some or all of the outstanding debt. Common types of secured loans include mortgages, where the property being purchased serves as collateral, and auto loans, where the vehicle functions as security for the borrowed funds.

Understanding the nature of secured loans is critical as they tend to have lower interest rates compared to unsecured loans. This is primarily due to the reduced risk for lenders, knowing they have an asset to claim in case of default. In contrast, unsecured loans do not have collateral backing them, making them riskier for lenders and often leading to higher interest rates.

In the options provided, knowing the distinctions helps reinforce that a secured loan is explicitly defined by its collateral arrangement, making it a fundamental concept in real estate financing and lending practices.