Why would a bank require collateral before issuing a loan? Give three examples of collateral.
Hint: Loans issued after taking a collateral allows the bank to gain legal right of ownership of the collateral. Collateral allows the bank to seize the property used as security in case the borrower defaults on a loan. The bank can then sell the asset to offset any loss from nonpayment. Collateral is also an incentive for the borrower to repay a loan. Collateral could be a house, boat, or car - any asset over which the borrower has legal right of ownership.