What is the main risk associated with using collateral to secure a loan?

The primary risk associated with using collateral to secure a loan is that the borrower can lose the pledged asset if they default on the loan. When a borrower secures a loan with collateral, they agree to an arrangement where a specific asset, such as a house or car, is used to back the loan. This means that if the borrower is unable to meet their repayment obligations, the lender has the right to take possession of that asset through a legal process known as foreclosure or repossession. This risk is significant because it means the borrower faces the potential loss of valuable property, which can have serious financial and personal implications, such as loss of home or transportation.

Other risks related to collateral might involve implications for the borrower's credit rating or fluctuating interest rates, but the immediate and most severe consequence of default is the loss of the collateral itself. Thus, being aware of this risk is crucial for borrowers when considering loans that require collateral.