Which of the following best describes the role of 'Collateral'?

Collateral plays a critical role in lending and borrowing by providing security for the lender. When a borrower takes out a loan, the lender requires collateral as a safeguard against default. This means that if the borrower fails to repay the loan, the lender has the legal right to seize the collateral to recover some or all of the outstanding debt.

For instance, if someone takes a loan to purchase a house, the house itself often serves as collateral. If the borrower stops making payments, the lender can initiate foreclosure proceedings to take possession of the property. This protective measure helps reduce the risk for lenders, as it gives them a tangible asset that can be liquidated to mitigate their losses.

In contrast, the other options do not accurately represent the concept of collateral. Interest on a loan is a separate financial obligation, employment guarantees are not related to collateral, and while credit risk can inform a lender's decision, it doesn't describe the function of collateral itself.