What role does collateral play in bank lending? Determines the borrower’s character Serves as security against the borrowed amount Increases the interest rate of the loan Facilitates priority sector lending
Question
What role does collateral play in bank lending? Determines the borrower’s character Serves as security against the borrowed amount Increases the interest rate of the loan Facilitates priority sector lending
Solution
Collateral plays a crucial role in bank lending as it serves as security against the borrowed amount. When a borrower applies for a loan, the bank needs assurance that the borrower can repay the amount. This is where collateral comes in. It is an asset or property that a borrower offers as a way for a lender to secure the loan.
If the borrower fails to repay the loan, the bank has the right to seize the collateral to recoup its losses. Therefore, collateral reduces the risk for the bank and can also help the borrower to secure a loan that they might not otherwise be able to get.
It's important to note that collateral does not determine the borrower's character, increase the interest rate of the loan, or facilitate priority sector lending. These are separate factors that banks may consider when deciding to approve a loan.
Similar Questions
in economics we use 'collateral' to use for any security for a loan taken but in accounts, it refers tothe secondary security and not the primary security
What is the main role of a bank?Multiple ChoiceServe as an intermediary between savers and borrowersInvest in businessesGive out loans to customersHold money in a safe for customers
Which is an example of a loan secured by collateral?A.Jorge secured a loan for $2,000 from his uncle.B.Trey secured a $2,000 loan to pay his college tuition.C.Jama charged $2,000 on her credit card for a vacation to Mexico.D.Joyce paid $2,000 in down payment and secured a loan on a new car.SUBMITarrow_backPREVIOUS
Fill in the Blank QuestionFill in the blank question.A loan backed by collateral, something valuable like property, is called a loan.
A secured loan is guaranteed by ____________.A.a fixed rateB.interestC.collateralD.an effective rate
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