What happens when a borrower defaults on a secured loan?

• A. The lender can seize the collateral.
• B. The lender must forgive the debt.
• C. The borrower automatically files for bankruptcy.
• D. The interest rate drops to zero.

Answer: (A)

When a borrower defaults on a secured loan, the asset pledged as collateral gives the lender a security interest in that property. Because the loan is backed by collateral, the lender has the right to seize or repossess the collateral to recover what is owed. After taking possession, the lender can sell the asset to pay off the outstanding balance, with the sale proceeds first covering the loan principal and interest and any costs. If the sale doesn’t fully cover the debt, the lender may pursue a deficiency against the borrower where permitted by law. This outcome is the practical consequence of the loan being secured, which is why default leads to collateral seizure rather than debt forgiveness, automatic bankruptcy, or the interest rate dropping to zero.