What defines a secured loan?

A secured loan is defined as a loan that is backed by collateral. This means that the borrower provides an asset, such as a house, car, or savings account, as security for the loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover their losses. This arrangement reduces the lender's risk, which often results in lower interest rates and more favorable loan terms compared to unsecured loans, which do not require collateral.

In contrast, a loan based solely on income, without any collateral, would be classified as an unsecured loan, which carries a greater risk for the lender. Loans requiring only financial statements without collateral do not meet the definition of a secured loan either. Additionally, while a loan with a variable interest rate can be secured or unsecured, the defining characteristic of a secured loan is the presence of collateral, not the structure of the interest rate.