What distinguishes secured credit from unsecured credit?

Secured credit is distinguished from unsecured credit primarily by the requirement of collateral. In secured credit arrangements, the borrower pledges an asset, such as real estate or a vehicle, to the lender as security for the loan. Should the borrower default on the payment, the lender has the legal right to seize the collateral to recover the outstanding amount owed. This collateral requirement reduces the risk for lenders and often leads to more favorable terms for borrowers, such as lower interest rates.

In contrast, unsecured credit does not involve any collateral. This means that the lender relies solely on the borrower’s creditworthiness and ability to repay the loan. Because there is no asset backing the loan, unsecured credit typically carries higher interest rates and stricter credit requirements.

The other choices do not accurately capture the primary distinction between secured and unsecured credit. For example, secured credit can have interest charges, credit limits can vary for both types, and both may require a credit history depending on the lender's policies and the borrower's financial situation.