Unsecured Loans

Contrary to secured loans, unsecured loans do not have collateral to secure the loan amount.  Unsecured loans are considered higher risk because of the borrower defaults on the loan, the lender can only send the account to collections and not be able to seize any property to recoup the losses.

The credit card is the most common example of the unsecured loan.  Unsecured loans are primarily underwritten with credit score, credit history, and income level as criteria to qualify.  Unsecured loans are different from secured loans because the higher risk in an unsecured loan usually means a high interest rate, usually 20% and up.

Secured Loans

A secured loan is a type of loan in which the borrower puts up some form of collateral, such as a car or house, or secure the loan.  In case of a default, the lender can retrieve his/her losses by taking possession of the asset and selling it off.  Examples of secured loans include mortgage loans and car loans.

Secured loans are associated with lower risks for the lender and a lower interest rate to the borrower.  From the lender's perspective, a default on the borrower's part will still lead to some sort of recouping of the original loan amount.  This is why a lender must underwrite these loans as a "no lose" situation for them.  From the borrower's perspective, the lower rates compared to an unsecured loan are better because that means lower payments.