Which type of credit involves an asset pledged as collateral?

Secured credit involves an asset pledged as collateral, which means the borrower offers a valuable item, such as a car or property, to guarantee the loan. If the borrower fails to repay the loan, the lender has the right to take possession of the asset to recover their losses. This arrangement reduces the lender's risk, often allowing them to offer lower interest rates compared to unsecured credit, where no collateral is provided.

Unsecured credit, on the other hand, does not involve any pledged assets, making it riskier for lenders. Revolving credit is a form of unsecured credit that allows borrowers to access a maximum credit limit and repay it over time, typically associated with credit cards. Fixed interest rates refer to the type of loan agreement where the interest percentage remains constant throughout the loan term, but this concept is not directly related to whether collateral is involved. Understanding the distinction between secured and unsecured credit is crucial for making informed borrowing decisions.