Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

Collateral is defined in the context of the five Cs of credit as what?

1. Current liabilities of the borrower

2. Resale value of the secure items if repossession becomes a reality

3. Borrower’s credit history

4. Debt-to-income ratio

The correct answer is: Resale value of the secure items if repossession becomes a reality

Collateral, in the context of the five Cs of credit, refers to the assets pledged by a borrower to secure a loan. It acts as a form of protection for the lender in the event that the borrower fails to meet their repayment obligations. The correct choice highlights the importance of the resale value of the secured items, as this value determines how much the lender could recover through the sale of the collateral if repossession is necessary. This assessment of potential recovery is crucial for lenders when evaluating the risk of extending credit. Understanding the value of collateral is essential for both lenders and borrowers. It assures the lender that there is a tangible asset backing the loan, providing confidence that they will not incur substantial losses. Factors such as the demand for the collateral, its condition, and market trends can all influence its resale value, ultimately affecting lending decisions.