What is collateral? Why do lenders ask for collateral while lending? Explain.

Collateral is an asset owned by the borrower like land, building etc. and is used as a guarantee to the lender till the loan is repaid.

Lenders ask for collateral because:

1. It serves as a security against the loan borrowed.

2. In case of failure of repayment of the loan, the lender can take the collateral as compensation.

Explanation: Collateral gives confidence to the lender of the repayment because the collateral would be lost to the borrower if he does not repay the loan completely.