Question

why do lenders ask for collateral while lending ?

Answer 1

Lenders ask collateral from the borrower and uses it as a gurentee or promise from the borrower to pay the loan in the future and if the borrower fails to repay the loan then they had legal rights to sell the asset and obtain money

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Answer 2

Collateral is an asset maintained by the borrower, such as property, home etc, and is accepted as a bond to the pawnbroker till the credit is returned. The following are the three reasons why the lenders demand collateral while loaning:

1. It functions as evidence or guarantees that a loan has been received by the borrower from the lender

2. It helps the lender to get back his money with interest.

3. In case of the insolvency of the repayment of the credit the lender can exercise it as compensation.