What indicates that a loan is adequately secured?

What indicates that a loan is adequately secured?

• A. The value of loan security is at least equal to the loan amount
• B. The loan officer has full control over borrower's assets
• C. The loan security value must be 150% of the loan amount
• D. The collateral must belong to the borrower

Answer: (A)

A loan is considered adequately secured when the value of the collateral or loan security is at least equal to the loan amount. This setup provides lenders with a measure of protection because, in the event of default, they can recover their investment by claiming the secured asset. It establishes a baseline of security that assures the lender that if the borrower fails to repay the loan, there are sufficient assets to cover the outstanding balance. While options like requiring the collateral's value to exceed the loan amount may provide even more security, the fundamental requirement for a loan to be adequately secured is that the value matches the loan. This arrangement is standard practice in lending, ensuring that the loan amount is backed by tangible assets, which reduces the lender's risk. The idea of the loan officer having full control over the borrower's assets does not inherently ensure adequate security, as control does not equate to value or coverage of the loan amount. Similarly, while the collateral should ideally belong to the borrower to ensure it can be claimed if necessary, the ownership itself does not affect whether the loan is adequately secured based on value.

A loan is considered adequately secured when the value of the collateral or loan security is at least equal to the loan amount. This setup provides lenders with a measure of protection because, in the event of default, they can recover their investment by claiming the secured asset. It establishes a baseline of security that assures the lender that if the borrower fails to repay the loan, there are sufficient assets to cover the outstanding balance.

While options like requiring the collateral's value to exceed the loan amount may provide even more security, the fundamental requirement for a loan to be adequately secured is that the value matches the loan. This arrangement is standard practice in lending, ensuring that the loan amount is backed by tangible assets, which reduces the lender's risk.

The idea of the loan officer having full control over the borrower's assets does not inherently ensure adequate security, as control does not equate to value or coverage of the loan amount. Similarly, while the collateral should ideally belong to the borrower to ensure it can be claimed if necessary, the ownership itself does not affect whether the loan is adequately secured based on value.