Why might a lender prefer to loan money to someone who owns a home rather than to someone who rents a home?

• A. Renters have more consumer surplus than homeowners.
• B. Homeowners can offer their property as collateral, reducing the lender's risk.
• C. Homeowners are less likely to spend money on other goods and services.
• D. Renters typically have higher incomes than homeowners.

Answer: (B)

Verified step by step guidance

1. Understand the concept of collateral in lending: Collateral is an asset that a borrower offers to a lender to secure a loan. If the borrower fails to repay, the lender can seize the collateral to recover the loan amount.
2. Recognize that homeowners have a tangible asset (their home) that can serve as collateral, whereas renters do not own property and thus cannot offer collateral in the same way.
3. Analyze how collateral reduces the lender's risk: Since the lender can claim the property if the borrower defaults, the risk of losing the loaned money decreases.
4. Consider why this risk reduction makes lenders prefer homeowners: Lower risk means lenders are more confident in getting their money back, which can lead to better loan terms or a higher likelihood of loan approval.
5. Evaluate the other options and understand why they are less relevant: Consumer surplus, spending habits, or income levels do not directly reduce the lender's risk like collateral does.