Final answer:
The difference between secured and unsecured debt is that secured debt is backed by collateral, which lenders can seize if the loan is not repaid. Unsecured debt lacks this protection.
Step-by-step explanation:
The difference between secured and unsecured debt lies in whether or not there is collateral attached to the debt.
Secured debt is backed by collateral, which is typically something valuable such as property or equipment. If the borrower fails to repay the loan, the lender has the right to seize and sell the collateral to recover the amount owed.
On the other hand, unsecured debt does not have any collateral attached to it. This means that the lender does not have any specific property or asset to recover the debt if the borrower defaults.
The key difference between secured and unsecured debt lies in whether collateral is attached to the debt. Collateral refers to something valuable, such as property or equipment, which a lender can legally take possession of and sell to recover the amount owed if a borrower defaults on the loan. In contrast, unsecured debt carries no collateral, and in the event of non-payment, lenders must use other methods to recover their funds, such as taking legal action.
Financial institutions may also implement other measures such as credit checks or requiring a cosigner, who is legally obligated to take on the debt if the original borrower cannot repay.