Final answer:
Collateral is valuable property or equipment a lender can seize and sell if a loan goes unpaid, and it's associated with secured loans. It functions as a security measure for lenders when issuing a loan. The student's correct answer is that collateral is taken by the lender if a loan is unpaid.
Step-by-step explanation:
Collateral is something valuable—often property or equipment—that a lender has the right to seize and sell if a borrower does not repay a loan. This security measure is typically associated with secured loans, as opposed to unsecured loans, which do not require collateral. Therefore, the correct answer to the student's question is that collateral is property that can be taken by the lender if a loan is unpaid.
In the financial capital market, before a bank issues a loan, it evaluates the borrower's income sources and conducts a credit check. Sometimes, a cosigner is required to legally pledge to repay the loan if the original borrower defaults. Ultimately, requiring collateral provides the lender with an assurance that they can recover the loan value in case of non-payment.