Which term refers to assets pledged to a lender as security for a loan?

Which term refers to assets pledged to a lender as security for a loan?

• A. Collateral
• B. Capacity
• C. Due diligence
• D. Private placement

Answer: (A)

Collateral is the assets a borrower pledges to a lender to secure a loan. By giving collateral, the borrower offers the lender a backup source of repayment; if payments stop, the lender can seize and sell the collateral to recover what’s owed. This lowers the lender’s risk and can help the borrower obtain better loan terms, such as a lower interest rate or a larger loan amount. Common examples include real estate, equipment, inventory, or accounts receivable. In contrast, capacity is about the borrower’s ability to repay from income or cash flow, not assets set aside. Due diligence is the investigation into the borrower's financial health and the loan terms. Private placement is a method of raising capital by selling securities to a select group of investors, not a security pledge for a loan. So, the term that fits is collateral.

Collateral is the assets a borrower pledges to a lender to secure a loan. By giving collateral, the borrower offers the lender a backup source of repayment; if payments stop, the lender can seize and sell the collateral to recover what’s owed. This lowers the lender’s risk and can help the borrower obtain better loan terms, such as a lower interest rate or a larger loan amount. Common examples include real estate, equipment, inventory, or accounts receivable. In contrast, capacity is about the borrower’s ability to repay from income or cash flow, not assets set aside. Due diligence is the investigation into the borrower's financial health and the loan terms. Private placement is a method of raising capital by selling securities to a select group of investors, not a security pledge for a loan. So, the term that fits is collateral.