Why does an unsecured loan have a higher interest rate than a secured loan?

A.

The bank bears all the risk of the loan.

B.

The bank charges more for poor credit scores.

C.

The bank bases higher interest rates on market conditions.

D.

The bank raises rates unfairly for unsecured loans.

The correct answer is option A. The bank bears all the risk of the loan.

Explanation:

An unsecured loan is a loan granted to a person where the bank will bear all the risks that may be suffered.

Since the bank will take care of all the risks, it will charge you a higher interest rate. This is because the bank has no guarantee if something goes wrong.

That is why for the delivery of these loans, the credit rating of the person who requests it is usually reviewed.

Given this information we can say that the correct answer is the option A.

An unsecured loan has a higher interest rate because the bank bears all the risk for the loan because if the borrower defaults on the loan, the bank has no collateral to collect to recover their money.