The use of collateral
A)allows banks to charge higher interest rates on loans.
B)makes it more costly for borrowers to take advantage of their asymmetric information.
C)makes it more costly for lenders to take advantage of their asymmetric information.
D)has important tax implications for both borrowers and lenders.

Question

Quizplus · Accepted Answer

Collateral serves as a security for the lender. If the borrower defaults, the lender can seize the collateral. This reduces the risk associated with lending, which is primarily due to asymmetric information where the borrower has more information about their ability to repay the loan than the lender. By requiring collateral, lenders make it more costly for borrowers to take out loans they cannot repay, thus mitigating the risk posed by asymmetric information.

The Use of Collateral