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

Lenders require collateral as a security measure to reduce the risk of default. Collateral is an asset pledged by the borrower that the lender can claim if the borrower fails to repay the loan. It ensures that the lender’s financial interests are protected.
- (a): Collateral does not necessarily lower interest rates.
- (b): Collateral is not aimed at personal relations.
- (c): While lenders aim for profit, collateral specifically addresses risk mitigation.