Hi, very good questions!
First of all, the collaterals can be redeemed once you repay your loans. This is useful in a situation where you expect your collateral to rise in value (especially in fiat value). For example if you hold 5 ETH, which is about $1200 in value now. However, you need to pay a quick debt of $100 to someone but you do not want to sell your ETH because you think it will increase in value in the future. Hence, you can use your ETH as collateral to loan $100 worth of stablecoins (e.g. USDC). You can then use that to pay your $100 debt while still having your 5 ETH. Later on if you manage to earn the $100 back in some ways, you can redeem your 5 ETH by repaying the $100 worth of stablecoins to the smart contract with some interest.
I hope I explained it well 😉
It's very risky. Yup it's well explained.