A secured loan is backed by an asset—typically the item you’re purchasing, like a car. If you fail to meet your loan obligations, the lender may repossess the asset to recover their losses. Because this reduces risk for the lender, secured loans often come with lower interest rates.
An unsecured loan doesn’t require any asset as collateral. The lender provides funds directly to you, and you can use them for your intended purpose. Since there’s no asset to recover in case of default, these loans usually have higher interest rates due to the increased risk to the lender.