Why does the formal or informal sector ask for a collateral?

cbse
economics
money-and-credit
cbse-class-10
cbse-class-10-social

#1

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.