Future Business Leaders of America (FBLA) Business Law Practice Exam

What type of loan is backed up by property that the creditor can take if the loan is not repaid?

1. Unsecured Loan

2. Secured Loan

3. Variable Loan

4. Conventional Loan

The correct answer is: Secured Loan

A secured loan is a type of loan that is backed by collateral, which is typically property or an asset. This collateral serves as a guarantee for the lender; if the borrower fails to repay the loan, the lender has the right to take possession of the collateral to recover the outstanding debt. This mechanism provides a lower risk for the lender, often resulting in lower interest rates compared to unsecured loans. In contrast, an unsecured loan does not have any collateral backing it. This means that if the borrower defaults, the lender cannot recover specific assets but instead must pursue other means of collection. Therefore, unsecured loans are generally considered to be higher risk for lenders. Variable loans refer to loans with interest rates that can change over time based on market conditions, while conventional loans typically denote those that follow standard underwriting guidelines without being insured or guaranteed by the government. Understanding the distinction between these types of loans helps clarify why a secured loan, backed by property, is essential for minimizing default risk for lenders.