Which term describes security pledged for the payment of a loan?

Which term describes security pledged for the payment of a loan?

• A. Collateral
• B. CD
• C. Chex-Systems
• D. Budget

Answer: (A)

Collateral is the asset you offer to a lender to secure a loan. By pledging collateral, you give the lender a way to recover the money if you can’t repay. Because the lender has a claim on that asset if you default, the risk for the lender is reduced and you may qualify for a larger loan or a lower interest rate. This is exactly what “security pledged for the payment of a loan” refers to. Other terms here describe different concepts: a certificate of deposit is a bank savings product that earns interest over time; ChexSystems is a database banks use to check your banking history; a budget is a plan for managing income and expenses. None of these describe the asset pledged to secure a loan the way collateral does.

Collateral is the asset you offer to a lender to secure a loan. By pledging collateral, you give the lender a way to recover the money if you can’t repay. Because the lender has a claim on that asset if you default, the risk for the lender is reduced and you may qualify for a larger loan or a lower interest rate. This is exactly what “security pledged for the payment of a loan” refers to.

Other terms here describe different concepts: a certificate of deposit is a bank savings product that earns interest over time; ChexSystems is a database banks use to check your banking history; a budget is a plan for managing income and expenses. None of these describe the asset pledged to secure a loan the way collateral does.