Question 8 of 29beginner💡 UnderstandShort Answer2 marks
Why do lenders ask for collateral while lending?
Correct Answer
Lenders ask for collateral while lending as a security against loans. Collateral is an asset that the borrower owns, such as land, building, vehicle, livestock, or deposits with banks, which is used as a guarantee to the lender until the loan is repaid.
If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment. This ensures that the lender can recover their money even when the borrower does not repay.
Exercise: LET'S WORK THESE OUT | Q: 1 | (Page Page 8)
For More Understanding
Explanation
The textbook explains that collateral acts as a guarantee for the lender. It is an asset owned by the borrower that the lender can sell if the borrower fails to repay. This protects the lender's financial interests and reduces the risk of lending.