In lending, what can happen if a borrower defaults on a loan secured with collateral?

When a borrower defaults on a loan that is secured with collateral, the lender has the legal right to seize the collateral to recover the amount owed. This is a fundamental aspect of secured lending, where the collateral provides security for the lender. If the borrower fails to meet their repayment obligations, the lender can take possession of the collateral and sell it to recoup their losses. This process typically follows specific legal procedures, which may vary by jurisdiction.

The option highlighting the seizure of collateral emphasizes the protective mechanism that secured loans provide to lenders, as it mitigates their risk compared to unsecured loans, where lenders have no claim to the borrower's assets in case of default. This dynamic is a critical aspect of risk management in finance and lending practices.