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

The bank and financial institution require collateral for loans because if the borrower defaults loan payments then the lender can seize the collateral to realize its losses.

Further Explanation:

Collateral  can be defined as the asset or property that can be accepted as  loan security by the lender.

The bank and financial institution require collateral property while giving loans because in case borrower defaults loan payments then the financial institution or bank can seize the property to realize its losses. The loans that require collateral security are termed as a secured loan. They rate of interest is low in comparison to the unsecured loans. The various types of collateral accepted by the bank are:

•Personal real estate.

•Personal vehicles

•Cash or savings accounts

•Valuables such as fine art, collectibles or jewelry

•Home equity

•Paychecks

•Investment accounts

•Paper investments

The  loan amount  determines the value of the asset or property that is required as the collateral . The bank and financial institution require collateral to safeguard themselves against any default made by the borrower. Therefore, the bank and financial institution require collateral for loans because if the borrower defaults loan payments then the lender can seize the collateral to realize its losses.

Learn more:

1.      Learn more about the lifetime cost of the loan along with interest

2.      Learn more about the interest on credit card

3.  Learn more about compound interest

Answer details:

Grade: High School

Subject: Business Studies

Chapter: Loan

Keywords: bank and the financial institution, collateral for loans , banking, financial services, lending the money, fund, business model, bankers.

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