A collateral is an asset such as land, building, livestock, vehicle or deposits with the banks that the borrower owns and uses this as a guarantee to the lender until the loan is repaid.
The lenders ask for a collateral before lending because:
- It is an asset that the borrower owns and uses this as a guarantee to the lender – until the loan is repaid.
- Collateral with the lender acts as a proof that the borrower will return the money.
- By keeping a collateral with the lender, the borrower is bound to be regular in paying the interest because the borrower does not want to lose the collateral.
