Question

Raul needed an expensive piece of equipment to expand his business. He borrowed the money from the bank and pledged the equipment as ___________. If Raul does not repay the loan, the bank can take his equipment.

Answer 1

Answer:

Collateral

Explanation:

The property or asset that a bank accepts as security for advancing credit is called collateral. The borrower offers collateral as an assurance to the lender that they will repay the loan.  If the borrower fails in repaying the loan, the bank or lender may seize the asset offered as collateral. The lender will sell it to recover part or all his losses.

In the case of Raul, the expensive equipment is the collateral. Should he not pay back the loan, the bank will sell the equipment to recover its money. Collateral does not have to be a physical asset, financial assets such as investment portfolio accounts, or savings accounts can be used as security.