Why do lenders ask for collateral while lending?

Why Lenders Ask for Collateral:
1. Security for the Lender: Collateral is like a safety deposit. It gives the lender something valuable as a backup in case the borrower can’t repay the loan.

2. Risk Reduction: It helps lower the risk for the lender. If the borrower can’t pay back, the lender can take the collateral to cover the loan amount.

3. Better Loan Terms: Offering collateral often means getting a lower interest rate or being able to borrow more money. It gives borrowers access to better loan terms.

4. Approval Assurance: For people with little credit history or lower credit scores, collateral can increase the chance of loan approval. Lenders feel more secure lending money when collateral is provided.

5. Following Rules: Sometimes, rules or laws require lenders to take collateral to make sure they’re lending responsibly and managing risks.

Collateral makes lenders more confident in giving loans by lowering their risk. It’s like a guarantee that helps people borrow money or get better loan deals.