What distinguishes secured loans from unsecured loans?

Secured loans are distinguished from unsecured loans primarily by the presence of collateral. When a loan is secured, the borrower offers an asset (such as a car or a home) as collateral to the lender. This means that if the borrower defaults on the loan, the lender has the right to take possession of the collateral to recoup their losses. This added security reduces the risk for lenders, which is why secured loans typically have lower interest rates compared to unsecured loans.

In contrast, unsecured loans do not require any collateral, making them riskier for lenders. Since there is no asset backing the loan, lenders often charge higher interest rates to compensate for this additional risk. Thus, option B correctly highlights the key characteristic of secured loans, which is the backing by collateral, differentiating them from unsecured loans that rely solely on the borrower's creditworthiness.