why do lenders ask for collateral while lending?
Answers
Answer:
lenders ask for collateral while lending because it payment of interest and repayment of the principal are not made on time, as the last resort the lenders can sell the collateral and recover their money.
In Banking or Finance,a collateral implies a security claimed by the bank or the lender as a means to ensure a secured alternative in the case of any potential loan default by the borrower of the loan.
Explanation:
Banks and official money lenders often impose or demands a collateral from the loan borrower as a security deposit against any possible loan default by the borrower in the future.The financial loans which involve security collateral are commonly termed as Secured loans indicating that under any circumstance/s,if the borrower is unable to pay the loan amount in full in the future,the bank of the lending agency or entity can claim and posses the particular collateral as agreed by both the parties in the official loan agreement.Therefore,it is way for the lender to secure the loan and avoid any kind of financial loss in the case of potential loan default by the borrower.Now,a collateral can normally constitute any private asset of the borrower such as vehicle,refrigerator,house or personal residence,jewelry and so forth which can be claimed by the bank or the lending entity at their inflation adjusted market value to cover up any financial loss due to future loan default.