Borrowing against an asset is consistently cheaper than borrowing without one. The difference reflects what the lender expects to recover if the loan fails rather than any judgment about the borrower.
Pricing follows expected loss, not probability of default
A lender's expected loss combines how likely default is with how much would be recovered afterwards. Security acts on the second term.
Two borrowers equally likely to default can be charged very differently if one loan is backed by a marketable asset and the other is not.
Because recovery on unsecured lending is low and slow, the rate has to carry a much larger allowance for losses.
Collateral establishes a defined recovery route
Security gives the lender a legal claim over an identified asset, with a process for taking possession and selling it if the obligation is not met.
An unsecured lender must instead pursue a judgment and then attempt enforcement against whatever the borrower happens to have.
The certainty and speed of the secured route are what the rate difference is paying for, quite apart from the value of the asset itself.
Priority determines who is paid first
In an insolvency, secured claims rank ahead of unsecured ones against the relevant asset, so unsecured creditors receive only what remains.
Where several charges exist over the same asset, they rank in order, and a second charge holder is paid only after the first is satisfied in full.
This is why second charge lending prices between first mortgages and unsecured loans: the security is real but the position behind it is weaker.
Asset characteristics change the discount
Property secures borrowing cheaply because it is durable, difficult to conceal and has an established resale market.
Vehicles secure borrowing less cheaply because they depreciate quickly and can be moved, so the collateral erodes over the life of the loan.
Assets that are specialised, perishable or hard to value support little rate benefit, since a lender cannot rely on realising them predictably.
The saving is paid for in downside exposure
The lower rate is compensation for accepting that a period of difficulty can cost the borrower the asset rather than producing a negotiation.
Secured lenders also have less incentive to agree forbearance, since their recovery does not depend on the borrower's continued cooperation.
Weighing a rate saving against that consequence is the substance of the decision, and it is worth taking regulated advice where a home is the security offered.