What is the principle of lending related to equity provided by a customer?

The principle of lending related to the equity provided by a customer is directly linked to the bank's initial risk. When a customer contributes equity—essentially their own capital—toward a loan, it serves as a buffer for the bank. This investment from the borrower signifies a greater commitment to the terms of the loan and aligns their interests with those of the lender. A higher equity contribution reduces the bank's risk exposure because it means that the customer has a personal stake in the property or investment being financed.

By having more equity in the transaction, the likelihood of default decreases, as the borrower is less inclined to walk away from an investment where they have already invested their funds. While the other options present alternative interpretations, they do not capture the fundamental relationship between equity and the inherent risk banks face when extending loans.