Question

Mr. Stone needs $3,000 to go on a vacation. He holds a $7,000 second trust deed note on Greenstone Park. Mr. Ford offers to lend Mr. Stone the $3,000 if he can hold the $7,000 note as security. If Mr. Stone agreed to this, it would be an example of a:

Answer 1

Mr. Stone's agreement with Mr. Ford to secure a $3,000 loan with a $7,000 second trust deed note is an example of collateralizing a loan, where the second trust deed note serves as collateral.

Step-by-step explanation:

Mr. Stone agreeing to give Mr. Ford the $7,000 second trust deed note as security for a $3,000 loan is an example of collateralizing a loan. Collateral is an asset that a borrower offers to a lender to secure a loan. If the borrower fails to pay back the loan, the lender can seize the collateral and sell it to recover the loan amount. In this case, the collateral is the second trust deed note that Mr. Stone holds on Greenstone Park.

To compare this to examples provided, let's consider Freda, who bought a house for $150,000 in cash whose value has increased to $250,000. This increase in value also represents potential collateral for a loan similar to Mr. Stone's situation. For instance, Freda could take out a loan against the increased value of her home. In another example, Ben bought a house for $100,000 with a 20% down payment and borrowed the rest. The value of the house has now risen to $160,000, and he has paid off $20,000 of the bank loan. Ben's equity in the property could serve as collateral for a new loan if he chooses to leverage it.