What is collateral? Why do lenders ask for collateral while lending? Explain.(Delhi - 2013)
Answers
Answer:
let me explain this to u in a simple way
Explanation:
Basically, collateral is a guarantee that you will pay back the lenders.
For example:
Imagine your brother asks to borrow your formal outfit for an occasion because his outfit is ruined. Now would u be willing to give it to him without a care in the world. No! u wouldn't like what if he ruins your outfit as well. So u ask him for his casual outfit which is as expensive or priced as your formal outfit if not more to be kept as a guarantee. So if he ruins your outfit you can have his casual outfit. But if he returns it back with no problem, u can give his outfit back to him.
Now, to the question as to why lenders would want collateral?
If u think about it in their shoes, if someone fails to pay back your money, it would be a lot of hassle to keep on asking him. Instead of that, just keep one of his belongings as a collateral like a car or gold ornaments. So he would naturally be anxious to get his car or gold back and would pay the debt as fast as he could.
This is why, lenders keep a collateral.
Have a nice day