Why does the formal or informal sector ask for collateral?

(i) Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.

(ii) In addition, lenders may demand a collateral or an asset that the borrower owns to use it as a guarantee until he repays the loan.

(iii) Interest rate, collateral and documentation requirement and the mode of repayment are the terms of credit required for formal or informal sectors for loan.