What does 'collateral' refer to in loan agreements?

What does 'collateral' refer to in loan agreements?

• A. An unsecured personal guarantee
• B. Funds held in a savings account
• C. An asset pledged as security for a loan
• D. A type of insurance policy

Answer: (C)

In loan agreements, 'collateral' refers to an asset pledged as security for a loan. This means that the borrower offers a specific asset, such as a car, property, or stock, to the lender as assurance that the loan will be repaid. If the borrower fails to meet the terms of the loan, the lender has the legal right to seize the collateral to recover their losses. This arrangement provides a level of security and reduces the risk for the lender, as they have a tangible asset to fall back on in case of default. Using collateral can also lead to better loan terms for the borrower, as it lowers the lender's risk. In contrast, the other choices involve concepts that do not align with the definition of collateral: an unsecured personal guarantee does not involve any asset and is based solely on the borrower's promise; funds in a savings account do not typically serve as collateral unless specified; and an insurance policy does not provide the same direct pledge of an asset that collateral does.

In loan agreements, 'collateral' refers to an asset pledged as security for a loan. This means that the borrower offers a specific asset, such as a car, property, or stock, to the lender as assurance that the loan will be repaid. If the borrower fails to meet the terms of the loan, the lender has the legal right to seize the collateral to recover their losses. This arrangement provides a level of security and reduces the risk for the lender, as they have a tangible asset to fall back on in case of default. Using collateral can also lead to better loan terms for the borrower, as it lowers the lender's risk.

In contrast, the other choices involve concepts that do not align with the definition of collateral: an unsecured personal guarantee does not involve any asset and is based solely on the borrower's promise; funds in a savings account do not typically serve as collateral unless specified; and an insurance policy does not provide the same direct pledge of an asset that collateral does.