Distinguish secured vs unsecured lending and the typical implications for risk and pricing.

• A. Secured lending uses collateral, generally lower risk and pricing; unsecured relies on creditworthiness, higher risk and pricing
• B. Secured lending has higher risk and higher pricing
• C. They have identical risk and pricing
• D. Unsecured lending is always cheaper and always requires collateral

Answer: (B)

What matters here is whether a loan is backed by collateral. When a loan is secured, the borrower pledges an asset (like a home or a car) that the lender can seize if the borrower defaults. This collateral lowers the lender’s potential loss, so the risk is reduced and lenders typically offer more favorable terms: lower interest rates, larger loan amounts relative to the collateral value, and sometimes longer repayment periods.

In contrast, unsecured lending has no collateral. The lender must rely on the borrower’s creditworthiness and income, so the risk of loss is higher if the borrower cannot repay. To compensate for that higher risk, lenders charge higher interest rates and may impose stricter underwriting or lower loan amounts.

Thus, the typical implication is that secured lending carries lower risk and lower pricing, while unsecured lending carries higher risk and higher pricing. Examples help: mortgages and car loans are secured and usually have lower rates; unsecured personal loans tend to have higher rates. Keep in mind that collateral value and borrower credit quality can influence pricing even within these general patterns.