The amount of security or collateral on a loan and the interest rate or risk premium on a loan normally are negatively related.

Question

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The more security or collateral (i.e. assets that can be seized if the borrower defaults) a borrower provides, the less risky the loan is for the lender. This allows the lender to offer a lower interest rate or risk premium. On the other hand, loans with little to no collateral or security are riskier and thus require a higher interest rate or risk premium to compensate for the increased risk.

The Amount of Security or Collateral on a Loan and the Interest