What is the key feature of a secured loan?

A secured loan is characterized by the requirement for collateral, which is an asset that a borrower offers to a lender to secure the loan. This collateral acts as a guarantee that the lender can recover some or all of the loan amount if the borrower fails to repay. Common examples of collateral include property, vehicles, or savings accounts. By requiring collateral, lenders reduce their risk, often which allows them to offer lower interest rates compared to unsecured loans, but the defining feature remains the necessity of that collateral. This principle is essential for borrowers to understand since it directly affects their ability to secure financing and the potential repercussions of defaulting on the loan.