Why does the formal or informal sector ask for a collateral?
Answer:
- Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.
- In addition, lenders may demand a collateral or an asset that the borrower owns to use it as a guarantee until he repays the loan.
- Interest rate, collateral and documentation requirement and the mode of repayment are the terms of credit required for formal or informal sectors for loans.