What type of debts do mortgages, auto loans, and student loans represent?

What type of debts do mortgages, auto loans, and student loans represent?

• A. Unsecured debt
• B. Secured debt
• C. Revolving credit
• D. Installment credit

Answer: (B)

Mortgages, auto loans, and student loans are classified as secured debt because they are backed by collateral. In the case of a mortgage, the property serves as collateral; for an auto loan, the vehicle is the collateral; and student loans may sometimes be backed by the future earning potential of the borrower or through specific agreements with educational institutions. This means that if the borrower defaults on these loans, the lender has the legal right to reclaim or seize the collateral to recover their losses. While some debts, such as credit card balances, represent unsecured debt because they are not backed by any specific asset, secured debt provides lenders with a layer of protection. The predictability of repayment through secured agreements often allows borrowers to access lower interest rates. Moreover, installment credit is related to making fixed monthly payments over time, but the key detail here is that mortgages, auto loans, and student loans explicitly involve collateral, distinguishing them as secured debts.

Mortgages, auto loans, and student loans are classified as secured debt because they are backed by collateral. In the case of a mortgage, the property serves as collateral; for an auto loan, the vehicle is the collateral; and student loans may sometimes be backed by the future earning potential of the borrower or through specific agreements with educational institutions. This means that if the borrower defaults on these loans, the lender has the legal right to reclaim or seize the collateral to recover their losses.

While some debts, such as credit card balances, represent unsecured debt because they are not backed by any specific asset, secured debt provides lenders with a layer of protection. The predictability of repayment through secured agreements often allows borrowers to access lower interest rates. Moreover, installment credit is related to making fixed monthly payments over time, but the key detail here is that mortgages, auto loans, and student loans explicitly involve collateral, distinguishing them as secured debts.