Why do lenders ask for collateral while lending? Explain.

• The term collateral is used in relation to the issuing of loans.
• When a bank issues a loan it expects a security or guarantee from the borrower.
• Usually this security is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks).
• If the borrower is unable to repay the loan, the lender can sell the collateral to recover its money.
• Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.