What is the legal consequence of a loan being secured by inflated collateral?

When a loan is secured by inflated collateral, the legal consequence is that the loan is valid only up to the actual value of the collateral. This is based on the principle that the lender has a right to receive repayment, but they cannot enforce repayment for more than what the collateral is truly worth. If the collateral's value is misrepresented or exaggerated, the lender can only claim the amount corresponding to its actual market value in the event of default.

This ensures fairness in lending and protects borrowers from being held liable for amounts greater than the value of what they pledged as security. In situations where the collateral's value is deemed inflated or misleading, it does not nullify the loan's validity entirely; rather, it limits the recovery rights of the lender to the real value of the collateral, thereby preventing unjust enrichment.

The other options suggest outcomes that wouldn't align with standard legal principles in secured transactions. Options suggesting automatic voiding or that require repayment of the inflated amount would not reflect the necessary legal balance in such financial agreements. Also, pursuing legal actions against the lender does not directly address the consequences of inflated collateral, focusing instead on potential disputes rather than resolving the issue of loan validity and value.