Summer 2022
BUILDING BLOCKS TEACHER GUIDE
3 of 9
Differentiating between secured
and unsecured loans
Exploring key nancial concepts
Credit offers seem to be everywhere, but not everyone who applies
for a loan will be approved. Creditors often evaluate a person’s
credit history to determine whether they will lend them money.
For people who are just starting to build their credit or who have
lower credit scores, it may be easier to get a secured loan than an
unsecured loan. Secured loans require the borrower to provide
collateral (something of value like a car, a boat, a home, etc.) that
the bank or lending institution can take to get their money back if
the borrower can’t pay back the loan.
Lenders may offer people with higher credit scores unsecured loans. These
loans require no collateral, so the bank or lending institution is trusting that these
borrowers will pay them back. This trust is based on their credit history—what
borrowers have done in the past that gives them a good credit rating. Because
unsecured loans put lenders at higher risk, they may have a higher interest rate
than secured loans. If that trust does not result in repayment, the lender can report
late or missing payments to the credit reporting companies, can engage in debt
collection, and might sue the borrower.
TIP
Because nancial products,
terms, and laws change,
students should be encouraged
to always look for the most
up-to-date information.
Teaching this activity
Whole-class introduction
§ Ask students if they or someone they know has ever lent someone money.
§ Ask students what kinds of things people consider before lending someone
money.
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Examples may include whether and when the borrower can pay the money
back or how much the lender would be willing to lend.
§ Read the “Exploring key nancial concepts” section to explain secured and
unsecured loans.
§ Ask students to take a moment to consider the similarities and differences
between secured and unsecured loans.
§ Be sure students have a basic context of loans:
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Loss of collateral isn’t the only consequence of nonpayment of a secured
loan. Nonpayment can result in such things as negative information on your
credit report, a lower credit score, debt collection, or being sued.