Question

_______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

Answer 1

Answer: Collateral is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

• Collateral is an asset that the borrower owns such as deposits with banks, livestocks, buildings, vehicles, and uses this as a guarantee to a lender until the loan is repaid.

Loans from Informal Lender – Collateral not Required

• It is easier to get loans from informal lenders.
• Collateral would not be required when taking loans from informal lenders.
• Here, the borrower may know the informal lender personally.

Loans from Banks – Collateral is Required

• Usually poor people may not have sufficient collateral to get loans from the banks. Banks loans need collateral (security) against loans.
• It is very difficult for poor people to borrow from banks when compared to borrowing money from informal sources.
• Bank loans require proper documentation.