Question

Which one of the following is the purpose of collateral in a loan?

• A. To increase the interest for the lender
• B. To secure the loan for the lender
• C. To reduce paperwork for the lender
• D. To avoid repayment on the loan

Hint:

Remember: \[ \boxed{\text{Collateral} = \text{Security against loan}} \] If the borrower fails to repay, the lender can sell the collateral to recover the loan amount.

Answer 1

The Correct Option is B

Step 1: Recall what collateral means.
Collateral is a valuable asset, like land, a vehicle, or jewellery, that a borrower promises to the lender while taking a loan.
Step 2: Think about why a lender would ask for it.
If the borrower cannot repay the loan, the lender can claim and sell the collateral to recover the money, which protects the lender from a total loss.
Step 3: Rule out the other options.
Collateral does not raise interest rates on its own, it does not cut down paperwork, and it certainly does not let the borrower skip repayment, since the whole point is the opposite of that.
Step 4: State the final answer.
So collateral exists to secure the loan for the lender. Hence, the correct answer is option (B).