What is typically a characteristic of unsecured loans?

What is typically a characteristic of unsecured loans?

• A. They have lower interest rates than secured loans
• B. They require collateral from the borrower
• C. They are often riskier and have higher interest rates
• D. They are solely for purchasing vehicles

Answer: (C)

Unsecured loans are typically characterized by the absence of collateral, which makes them inherently riskier for lenders compared to secured loans. This higher risk is a significant factor in determining the loan's interest rate. Because lenders cannot seize an asset (like a home or car) if the borrower defaults, they mitigate this risk by charging higher interest rates on unsecured loans to offset potential losses. In contrast, secured loans generally have lower interest rates since the lender has collateral to claim against in case of default. Moreover, unsecured loans can be used for various purposes beyond purchasing vehicles, making them versatile financial tools. Thus, the characteristic of being riskier and having higher interest rates is a defining feature of unsecured loans.

Unsecured loans are typically characterized by the absence of collateral, which makes them inherently riskier for lenders compared to secured loans. This higher risk is a significant factor in determining the loan's interest rate. Because lenders cannot seize an asset (like a home or car) if the borrower defaults, they mitigate this risk by charging higher interest rates on unsecured loans to offset potential losses.

In contrast, secured loans generally have lower interest rates since the lender has collateral to claim against in case of default. Moreover, unsecured loans can be used for various purposes beyond purchasing vehicles, making them versatile financial tools. Thus, the characteristic of being riskier and having higher interest rates is a defining feature of unsecured loans.