What typically happens to the interest rates of unsecured loans compared to secured loans?

Unsecured loans usually have higher interest rates compared to secured loans due to the additional risk that lenders take on. When a loan is unsecured, it means that it is not backed by any collateral, such as a house or a car. This lack of collateral increases the risk for lenders because, in the event of default, they have no specific asset they can claim to recoup their losses. To compensate for this higher risk, lenders typically charge a higher interest rate on unsecured loans.

In contrast, secured loans are backed by collateral, which provides the lender with some assurance that they can recover their funds if the borrower defaults. Because of this reduced risk, secured loans often come with lower interest rates. Rates being identical for both types of loans does not reflect the risk dynamics involved; thus, it does not accurately describe the typical lending landscape. Finally, the mention of secured loans having fluctuating rates is irrelevant to the comparison of interest rates between secured and unsecured loans, as fluctuations depend on various factors such as market conditions and specific loan agreements rather than the inherent characteristics of the loan type itself.