In legal terms, what is collateral?

Collateral refers to property or assets that are pledged by a borrower to secure a loan or credit extension. In the event that the borrower fails to repay the loan as agreed, the lender has the right to seize the collateral as a form of repayment. This legal concept serves to reduce the risk for lenders by providing them with a tangible asset that can be recovered if the borrower defaults on the loan.

In the context of the other options, merchandise sold on credit does not represent a type of collateral; rather, it describes a sale arrangement. A financial penalty for failure to repay may pertain to fees or increased interest rates but does not involve the securing of a loan. An unsecured line of credit is a type of credit that does not require collateral, thus increasing the lender's risk due to the lack of security in case of default. Thus, the definition of collateral accurately aligns with property that guarantees loan repayment, making it the correct choice.