A lender who wants to avoid the problem of adverse selection could:

Question

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By charging a low interest rate and requiring applicants to provide information that would prove their creditworthiness, the lender can avoid adverse selection by selecting only the borrowers who are less risky. This will reduce the lender's potential losses from default, while also attracting more borrowers to apply for loans because of the lower interest rate. Charging a very high interest rate (A) would only attract the most risky borrowers, while charging the same average interest rate to all borrowers (B) would not differentiate between high-risk and low-risk borrowers, which could lead to adverse selection. Only lending by issuing credit cards (D) would not necessarily solve the problem of adverse selection, as credit card holders could still default on their payments.

A Lender Who Wants to Avoid the Problem of Adverse