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Social Science — CBSE Class 10 board question

Q1. [1]
Why do lenders often require collateral before lending loan ? Choose the most suitable option from the following.
  1. (a) To lower interest rates for borrowers.
  2. (b) To establish personal relations.
  3. (c) To increase their profit margins.
  4. (d) To mitigate the risk of loan default.
Previously asked in CBSE board exam
2024 32/1/1 Q19
Generated by claude-sonnet-4-6 · 2026-06-15 06:55 · grounding rag
Model Answer

(d) To mitigate the risk of loan default.

If the borrower fails to repay, the lender can sell the collateral to recover the loan amount.

Source: Terms of Credit, Chapter 3

Explanation

The passage clearly states: "If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment." This directly points to risk mitigation / protection against default as the purpose of collateral. Options (a), (b), and (c) are not supported by the text and are incorrect.

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