Future Business Leaders of America (FBLA) Personal Finance Practice Test

Which of the following is an example of an unsecured loan?

1. A mortgage

2. A car loan

3. A personal loan

4. A student loan

The correct answer is: A personal loan

A personal loan is an example of an unsecured loan because it is not backed by collateral. This means that the lender provides the funds based solely on the borrower's creditworthiness and ability to repay, rather than requiring specific assets to secure the loan. Unsecured loans typically have higher interest rates compared to secured loans because of the greater risk to the lender. In contrast, a mortgage involves borrowing money to buy real estate, with the property serving as collateral. Similarly, a car loan is secured by the vehicle being financed, and if the borrower fails to make payments, the lender can repossess the car. A student loan, while commonly considered an unsecured type of financing, is often backed by government guarantees or special repayment options that can make it less risky for lenders, but typically features more flexible repayment plans. Thus, personal loans uniquely fit the unsecured category as they rely heavily on credit and do not require collateral.