how is collateral useful in a credit situation?
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Collateral is an asset that a lender accepts as security for a loan. If the borrower defaults on the loan payments, the lender can seize the collateral and resell it to recoup the losses.
How Collateral Works
Loans that are secured by collateral are typically available at substantially lower interest rates than unsecured loans. The borrower has a compelling reason to repay the loan on time. If the borrower defaults, the lender can seize the property and sell it to recoup some or all of the losses.
A lender's claim to a borrower's collateral is called a lien.
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How Collateral Helps You. Collateral covers a multitude of sins. If you have a low credit score, you might normally be declined a loan, but with collateral your lender might be more likely to take that risk because the lender can take ownership of the asset pledged and thus reduce the risk it takes on by loaning to you money