Why might a lender choose to offer unsecured short-term loans instead of requiring collateral?

• A. Collateral is never available for short-term loans.
• B. Unsecured loans always have lower interest rates than secured loans.
• C. The borrower has a strong credit history and established relationship with the lender.
• D. Lenders are legally prohibited from requesting collateral for short-term loans.

Answer: (C)

Verified step by step guidance

1. Understand the concept of secured and unsecured loans: Secured loans require collateral, which is an asset pledged by the borrower to secure the loan. Unsecured loans do not require collateral and are based on the borrower's creditworthiness.
2. Analyze the reasons why a lender might offer unsecured loans: Lenders may choose to offer unsecured loans if the borrower has a strong credit history, demonstrating reliability in repaying debts.
3. Consider the relationship between the borrower and lender: An established relationship with the lender can build trust, making the lender more comfortable offering unsecured loans without collateral.
4. Evaluate the legal and practical aspects: While collateral is commonly used for secured loans, it is not legally prohibited for short-term loans. However, lenders may opt for unsecured loans for simplicity and efficiency in certain cases.
5. Conclude that the correct answer is based on the borrower's credit history and relationship with the lender, as these factors reduce the lender's perceived risk and make collateral unnecessary.