How is Collateral defined in the context of loans?

Collateral is defined as a physical asset pledged as security for a loan, which makes option B the correct choice. When an individual or a business takes out a loan, they may be required to provide collateral as a way to protect the lender. This collateral can be in the form of real estate, vehicles, equipment, or other valuable items that can be seized by the lender if the borrower fails to repay the loan.

The purpose of collateral is to reduce the risk faced by the lender. By having a tangible asset that can be claimed in the event of a default, lenders are more likely to approve loans and may offer more favorable terms, such as lower interest rates. This is because the presence of collateral provides lenders with a level of security, ensuring that they have a way to recoup their losses if necessary.

The other options discuss concepts related to loans but do not accurately define collateral. A guarantee from a co-signer refers to an agreement where another party agrees to take on the responsibility of the loan if the primary borrower defaults, which is not the same as collateral. Creditworthiness assesses a borrower's likelihood to repay a loan based on their financial history, while a measure of the borrower’s income stability evaluates their ability to maintain consistent income levels. Both