Question

The asset or assets that a borrower pledges in order to guarantee repayment of a loan is called as
1. Cheque
2. Collateral
3. Guarantee card
4. Bond

Answer 1

Correct Answer - Option 2 : Collateral

The correct answer is Collateral.

• Collateral is an asset or property that an individual or entity offers to a lender as security for a loan.
• It is used as a way to obtain a loan, acting as a protection against potential loss for the lender should the borrower default.

• Collateral minimizes the risk for lenders.
• If a borrower defaults on the loan, the lender can seize the collateral and sell it to recoup its losses.
• Mortgages and car loans are two types of collateralized loans.
• A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.