Which describes the difference between secured and unsecured credit?
Secured credit is backed by an asset equal to the value of a loan, while unsecured credit is not guaranteed by a material object.
Unsecured credit is backed by an asset equal to the value of a loan, while secured credit is not guaranteed by a material object.
Secured credit is risky because banks cannot seize assets, while unsecured credit is less risky because it is backed by material objects.
Unsecured credit enables lenders to seize an asset if a loan is not paid, while secured credit prohibits lenders from taking material objects.
The correct answer is: Secured credit is backed by an asset equal to the value of a loan, while unsecured credit is not guaranteed by a material object.
Explanation: Secured credit involves a loan that is backed by collateral, such as a car or property, which the lender can claim if the borrower defaults on the loan. In contrast, unsecured credit does not require collateral; lenders rely on the borrower’s creditworthiness. Since there’s no asset to back the loan, unsecured credit typically comes with higher interest rates due to the increased risk to lenders.