Question

Why do lenders often require collateral before lending a loan? Choose the most suitable option from the following:

• A. To lower interest rates for borrowers.
• B. To establish personal relations.
• C. To increase their profit margins.
• D. To mitigate the risk of loan default.

Answer 1

The Correct Option is D

To mitigate the risk of borrower default, lenders mandate collateral. This asset, pledged by the borrower, can be claimed by the lender if the loan is not repaid. Collateral safeguards the lender's financial interests.
- (a): Collateral doesn't automatically reduce interest rates.
- (b): Collateral's purpose isn't personal relationships.
- (c): Collateral primarily focuses on risk reduction, even though lenders seek profit.