Final answer:
Violating loan covenants can lead to severe consequences such as defaulting on the loan and incurring additional fees and penalties.
Step-by-step explanation:
Violating loan covenants can lead to severe consequences for borrowers. These consequences can include:
- Defaulting on the loan: If the borrower fails to meet the requirements set out in the loan covenants, such as making timely payments or maintaining certain financial ratios, the lender can declare a default and demand immediate repayment of the loan.
- Additional fees and penalties: When loan covenants are violated, the lender may impose additional fees and penalties, increasing the cost of borrowing.
- Loss of collateral: If the loan is secured by collateral, such as a house or car, the lender may have the right to seize the collateral in the event of default.
It is important for borrowers to carefully review and understand the loan covenants before accepting a loan to avoid these potential consequences.