system
Given the following post, respond as if you're commenting on Reddit:
human
Why wouldn't banks prefer to get compensated with loan defaults (i.e., collecting collateral) rather than through interest?

A lender can take as profit an interest rate, say 3% of the money it lends. *Or*, it can take as payment the collateral (eg. a car or house) if the borrower defaults on a loan. Wouldn't a car/house/equity/whatever given collateral be much more valuable to be compensated with a small percentage of the money lent (plus, banks can collect some of the money it lent back before the borrower defaults).
gpt
They wouldn’t mostly because of the risk associated with collection and the motivations involved. Of course, the person with the collateral doesn’t want to lose it, and the prospect of banks collecting on a default is almost always a nightmare for banks because of regulations regarding collections and the people who hold the collateral. 

Take a house. Say a person defaults on their mortgage and the bank is taking their home. Well, by law they’re going to have to default for several months before the bank can collect, and even at that point they often have optional repayment plans they can enter into at any time. Now. Say we’re at the point that the bank is absolutely kicking them out, well a lot of people are going to gut the house (I.e, they’re going to fuck the house up in a number of ways to screw the bank). 

Now the bank has a house, almost certainly in a worse condition than when it was bought, and now they’re responsible for selling this house in the open market which may or may not be favorable at the time they’re trying to sell.

In the end, the bank much prefers you to pay your mortgage and collect their interest. This is more complicated though because a lot of banks package debt and sell it in the form of securities, so it’s really investors who prefer you not to default and banks who just service the mortgage. They still really prefer you not default though because the investors don’t take too kindly to their loan products falling apart.