Secured loans are less costly than unsecured loans because _________.

Secured loans are less costly than unsecured loans because _________.

A. They usually have a lower interest rate.

B. They require collateral.

C. They are less risky for the financial institution.

D. All of these are true.

Answer: D. All of these are true.

Yes, secured loans are less expensive than unsecured loans because of the options enumerated in the list, and all are accurate. First, the secured loans were cheaper than the unsecured loans more so in the area of interest rates. It shall be linked to the reduction of the risks for the lender. For instance, while a mortgage which is a secured form of credit may attract interest of 3-4 percent for a personal loan which is an unsecured form of credit the interest may be 10-15 percent or more. The only condition that makes secured loans comparatively less unsafe from the viewpoint of financial institutions is the requirement of procurement of collateral. The borrower’s security is property put forward by the borrower to the lender if the borrower defaults in the payment of the loan. In other words, if for example, it is a mortgage then the house forms security for the entire credit. Therefore, for an auto loan, the car becomes collateral. By doing this, it ensures that in a scenario where the borrower is unable to repay the loans, the given securities are sold to repay the losses. This reduces the risk to the lender and this in effect makes the lender extend the amount at a lower interest rate to the borrower. This is how the lower risk profile of the financial institution becomes the foundation for the lower interest rates as well as the willingness of the lenders to provide secured loans. Therefore, it could be said that it is more beneficial for the borrower because all the discussed above sides – the requirement of collateral, lower risk, and lower interest rates – are less unprofitable for the borrower but more profitable for the supplier at the same time.