Final answer:
A loan covenant specifies terms of a loan agreement that, if broken, can allow the lender to renegotiate the terms of the loan to force repayment.
Step-by-step explanation:
A loan covenant specifies terms of a loan agreement that, if broken, can allow the lender to renegotiate the terms of the loan to force repayment.
For example, a loan covenant may require the borrower to maintain a certain level of financial performance or provide regular financial reports to the lender. If the borrower fails to meet these requirements, the lender may have the right to demand immediate repayment or change the interest rate.
Overall, loan covenants protect lenders by giving them recourse if the borrower does not fulfill their obligations.