Question

Why do banks and other financial institutions require collateral for loans?

A) to raise needed funds
B) banks want profit motives
C) to reduce the risk of lending
D) to assess the trustworthiness of the customer

Answer 1

If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Since collateral offers some security to the lender should the borrower fail to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans.

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Answer 2

Answer: The answer is C: to reduce the risk of lending

Banks and other financial institutions require collateral for loans to reduce the risk of lending.

Step-by-step explanation:

Collateral refers to anything or an item of value which is accepted as a substitute form of repayment in case loan is not repaid. It is an asset can be taken if an individual fail to pay his or her loan. If the individual fails to repay the loan, the bank will seize and sell the assets. It is a legal binding contract.