They must do so in order to compensate for any losses that may occur,
Exactly.
now I understand how this type of loan works.
Actually, there is no real type of loan since there are all the same. The only thing that is different is the type of collateral. Soon banks will take crypto besides your/ my house...
That will be great for banks to take crypto instead of a house. I feel like it's scary to put a house as collateral even if you will return the loan at the required time. But still a loan it's a loan, it still scared even if you will put something else as collateral 😅.