What characterizes unsecured loans compared to secured loans?

Unsecured loans are characterized by the absence of collateral, which is a key differentiator from secured loans. When a loan is unsecured, the lender does not require any asset or property to be pledged as security for the loan. This means that if the borrower defaults, the lender does not have a specific asset to seize as repayment.

In contrast, secured loans are backed by collateral, which provides the lender with a level of security. This collateral can be property, such as a house or a car, that the lender can take possession of if the borrower fails to repay the loan. This characteristic of having no collateral in unsecured loans often results in higher interest rates, as lenders take on more risk without having an asset to claim if the loan is not repaid. However, the defining feature is the lack of collateral, solidifying the classification of these loans as unsecured.

Thus, the absence of collateral in unsecured loans is fundamental to understanding how they function compared to secured loans, leading to the correct identification of the answer.