The correct option is 2 and 3 only.
Explanation
In the banking and credit system, 'Terms of Credit' refers to the specific conditions agreed upon by the lender and the borrower. These include the interest rate, documentation requirements, mode of repayment, and collateral. Collateral acts as a security buffer for the lender against the risk of default.
Statement 1 is Incorrect:
Collateral is an asset that the borrower owns (e.g., land, building, vehicle, livestock, or bank deposits) and uses as a guarantee to a lender until the loan is repaid. It is not an asset given by the lender to the borrower; rather, it is pledged by the borrower to secure the credit.
Statement 2 is Correct:
The fundamental purpose of collateral is to secure the loan. If the borrower fails to repay the loan (default), the lender retains the legal right to sell the collateral or liquidate the asset to recover the outstanding loan amount.
Statement 3 is Correct:
Assets that hold tangible or financial value and can be liquidated are used as collateral. Common examples include land titles, house papers, vehicles, livestock, and financial assets like deposits with banks (Fixed Deposits).
Key Takeaway:
Collateral is an asset owned by the borrower and pledged to the lender as security. It grants the lender the right to sell the asset for debt recovery in the event of a default.