CSEET · Business Communication · Common Business Terminologies
Which of the following best describes the term 'collateral' in a loan agreement?
Collateral is an asset that a borrower pledges to the lender as security for a loan. If the borrower fails to repay, the lender may recover the dues by selling that asset. It is different from interest, fees or the loan tenure.
- AThe rate of interest charged on the loan
- BAn asset pledged by the borrower as security for repaymentCorrect
- CA fee charged for early closure of the loan
- DThe total period over which the loan is repaid
Explanation
Collateral is an asset such as property or gold that the borrower pledges to secure a loan. If the borrower defaults, the lender can recover dues from it. Interest rate, prepayment fee and tenure are other loan terms.
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