Mortgage Loan Originator (MLO) Licensing Practice Test

A secured loan is one that is backed by collateral, which gives the lender the right to seize the asset if the borrower defaults on the loan. In the context of mortgage loans, the property being financed serves as the collateral. This means that if the borrower fails to make payments, the lender can take possession of the property through a legal process called foreclosure. This arrangement reduces the lender's risk and often results in more favorable loan terms, such as lower interest rates, compared to unsecured loans.

In contrast, unsecured loans do not require collateral, making them riskier for lenders and typically resulting in higher interest rates due to the increased risk of default. While conventional loans can be secured or unsecured depending on the specifics of the situation, installment loans refer broadly to loans that are repaid in fixed payments over time and may or may not be secured, so they do not directly answer the question about requiring a mortgage as security in case of default. Thus, secured loans are specifically designed to include a mortgage collateral requirement.