What is the primary distinction between a personal loan and a secured loan?

The primary distinction between a personal loan and a secured loan lies in how they are backed and assessed. A personal loan is typically an unsecured loan, meaning it is provided based on the borrower’s creditworthiness and ability to repay, rather than being tied to any specific asset. This means lenders evaluate the borrower's credit history, income, and financial habits to determine eligibility and the terms of the loan.

In contrast, a secured loan is one that requires the borrower to provide collateral, which is an asset that can be seized by the lender if the borrower defaults on the loan. This collateral reduces the risk for the lender, often resulting in lower interest rates compared to unsecured personal loans. The presence of collateral allows lenders to provide loans even to borrowers with lower credit scores, as they have a form of security to back the loan.

Understanding this distinction helps borrowers choose the right type of loan based on their financial circumstances and needs.