Social Science (087) — AI-generated practice question

Collateral is an asset (such as land, building, or house) that a borrower pledges as a guarantee to the lender until the loan is repaid.

Before default: The collateral acts as a security guarantee, ensuring the borrower is committed to repayment. The lender retains the documents of the collateral (e.g., house papers), which are returned only after full repayment.

After default: If the borrower fails to repay, the lender has the right to sell the collateral to recover the loan amount, thus protecting the lender from financial loss.

Source: Chapter 3 – Money and Credit, Terms of Credit

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• The examiner looks for: (1) definition of collateral, (2) its role before default (security/commitment), and (3) its role after default (right to sell asset). Each point carries roughly 1 mark.
• Use the textbook phrase "right to sell the asset" — this is key CBSE language.
• The house-loan example (Megha) from the textbook is ideal to cite as it shows documents retained as collateral until full repayment.
• Do not confuse collateral with interest rate — they are separate terms of credit.