Consumer Lending Theory
Banks decide who to loan to through loan history, people with better history and seem more reliable will have better rates, and better loans. On the other hand people who have a bad credit score may still be able to receive a loan, but they most likely will have high interest rates, because they are more likely to not be able to pay the loan back.
Adverse Selection-is a theory that borrowers who are most willing to accept a high interest rate are most likely the ones who will fail to pay that loan.
Captive Borrower- is a borrower who has a bad credit history, and is most likely to search for loan institutions that are willing to loan to people in his situation and these companies have low standards.
Moral Hazard- is when people take risks, because they feel like they can always get away with something, and that they will always get bailed out. These borrowers have never been taught a lesson or learned from their mistakes.
Credit Rationing-When a bank refuses to loan someone money, or when they loan someone less than they asked for, and refuse to loan them the requested amount.