Social Science (087) — AI-generated practice question

Collateral is an asset owned by the borrower (such as land, building, vehicle, livestock, or bank deposits) that is used as a guarantee to the lender until the loan is repaid.

Lenders require collateral because it acts as security against the loan. If the borrower fails to repay, the lender has the right to sell the collateral to recover the money. It reduces the lender's risk and ensures that the borrower has an incentive to repay.

Source: Chapter 3 — Money and Credit, Terms of Credit

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• Definition (1 mark): Define collateral clearly with 1–2 examples from the text.
• Why required (2 marks): Two reasons — security for the lender, and right to sell if the borrower defaults. Both points must be stated.
• Examiners expect examples like land, building, livestock, bank deposits — pick at least one.
• Avoid writing a vague answer like "it is for safety"; always say whose safety and what happens if the loan is not repaid.