What is collateral?
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Something pledged as security for repayment of a loan to be forfeited in the event of a default.
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Collateral:
- Collateral can be considered as a ‘borrower’s pledge’ in order to specify the lending property and loan repayments.
- It serves as the protection to lender against the borrower and hence it can be used as the offset of the loan, if the borrower failed to pay the interest or principle under the conditions and terms of the lending based agreement.
- This protection allows the lenders to get a minimal interest rate on loans with collateral. This reduction can be up to several percentage points.
Learn more about collateral
Justify with three logics the necessity of collateral for a loan.
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