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Question
Why do banks or lenders demand collateral against loans?
Solution
Bank ask for collateral while giving a loan because of the following reasons:
If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. Reduction of exposure in order to do more business with each other when credit limits are under pressure.
The loan is secured against the collateral. In the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or the entire amount originally loaned to the borrower.
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