A mortgage carries a far lower rate than a credit card, and the borrower may be the same person with the same income. The difference is what the lender can do if payments stop.
Security is a claim on a specific asset
A secured loan attaches a legal charge to identified property, giving the lender the right to take and sell it to recover what is owed.
Unsecured lending carries no such claim. If payments stop, the lender pursues the borrower personally through collection and, if necessary, the courts.
The distinction determines expected loss. Recovery from an asset sale is usually far higher and far more certain than recovery from an unsecured claim.
Expected loss drives the rate
A lender prices a loan to cover funding costs, operating costs and expected losses, with the loss component varying most between products.
Where recovery is likely to be substantial, the loss allowance is small and the rate can be low. Where recovery is uncertain, the allowance must be large.
This is why the gap between secured and unsecured rates is wide and persistent, and why it widens further when asset values become volatile.
The asset's characteristics matter
Property supports the lowest rates because it is durable, difficult to conceal and holds value reasonably well, so recovery is predictable over long periods.
Vehicles support lower rates than unsecured borrowing but higher than property, since they depreciate quickly and can be moved, which reduces the certainty of recovery.
Assets that are specialised, perishable or easily transferred provide little effective security, and lending against them prices closer to unsecured levels.
Loan to value adjusts the pricing further
Borrowing a small fraction of an asset's value leaves a substantial cushion, so a fall in value still leaves the lender fully covered.
Borrowing close to the full value removes that cushion, and rates rise accordingly because a modest decline would leave the lender exposed.
This is why rates step down at defined thresholds, and why repaying to cross one can produce a disproportionate improvement in the rate available.
The borrower is accepting a different risk
A lower rate is purchased by placing an asset at risk, and the consequence of default changes from a damaged credit record to the loss of the asset itself.
Converting unsecured obligations into secured ones therefore reduces cost while increasing the severity of the worst outcome, which is a trade rather than an improvement.
The judgement depends on how stable the borrower's income is, since the arrangement is favourable while payments continue and considerably worse if they cannot.