Chapter 4.3, Problem 4R

Solution

Difference between secured and unsecured loan is to be explained.

Secured loans are the type of loans in which it requires borrower have collateral in case the borrower defaults. Common examples of secured loans are car loans and home mortgage. These kinds of loans have low interest rate and have longer repayment schemes. If a person repays the loan on time with consistency, then the person can improve the credit score. If a person fails to repay the loan, it will also result in losing the collateral.

In contrary to this, unsecured loans are the kind of loans in which it does not requires collateral. Under this, the lenders are in high risk because they are providing the loans to the borrower only by accepting the words of the borrower. The borrower may promise to repay the loan but if borrower defaults, then it would be sometimes difficult to collect a debt. Examples of unsecured loans are credit cards and personal loans. These kinds of loans have high interest rates and are convenient and easily to acquire. When a person pays on time, this would lead to increase in their credit score and then they qualify for the lower interest secured loans.