Adverse Selection about Borrowing a Business Loan from the Bank with Very High Rates
Generally, financial institutions categorize borrowers into two types, namely borrowers who are likely to pay back the facility and those who are less likely to service their loans. Therefore, banks strive to be able to tell the type of a borrower lest they attract only none trusted borrowers. In this regard, I would advise my friend first to demonstrate that he is a good borrower and that he will certainly repay the loan and the interest. My friend has to do something that a lousy borrower would not do. I would, therefore, advise him to attach collateral to the loan as this could potentially attract good interest. Even if he cannot service the loan, the bank would sell off the collateral to cover the loss (Information Asymmetry: Adverse Selection and Moral Hazard, 2019) .
A Moral Hazard Explanation and Advice On How to Solve The Problem
When you lend a loan to someone, it’s hard to tell if the borrower will repay the money. Only the borrower is aware of his future financial prospects (Information Asymmetry: Adverse Selection and Moral Hazard, 2019) . There is a high risk that my friend will not invest the borrowed money for the intended use.
Delegate your assignment to our experts and they will do the rest.
I would, therefore, advise my friend to be conscious about the use of his borrowed money and avoid any risky behavior. He, however, ought to demonstrate to the lender that he is too unlikely to be a bad debtor. The bank is cautious to avoid investing in risky borrowers, and therefore my friend has to be willing to prove his utmost good faith. For example, I would advise him to sign a contract that would limit potentially risky behaviors after being awarded the loan.
References
Information Asymmetry: Adverse Selection and Moral Hazard . (2019). Retrieved from https://thismatter.com/money/banking/information-asymmetry.htm
