Purpose of Loan, Source of Repayment, Collateral

Purpose of loan refers to the reason why a borrower is seeking a loan. Lenders and financial institutions typically require borrowers to state the purpose of the loan during the loan application process. Common purposes of loans include purchasing a home or car, financing a business, consolidating debt, or covering unexpected expenses.

Source of repayment refers to the funds that will be used by the borrower to repay the loan. The source of repayment can vary depending on the borrower’s financial situation and the purpose of the loan. For example, a borrower might use their income from a job to make loan payments or they may use income generated from a business. Lenders and financial institutions typically require borrowers to demonstrate that they have a reliable source of income or funds to repay the loan.

Collateral is an asset that a borrower pledges as security for a loan. In the event that the borrower is unable to repay the loan, the lender has the right to seize the collateral and sell it to recover their losses. Common examples of collateral include a home or car, but other assets such as stocks, jewelry, or art can also be used as collateral. Lenders and financial institutions typically require borrowers to provide collateral for high-risk loans or loans with large amounts. The value of the collateral is usually required to be equal to or greater than the loan amount.