A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending?

Question

Quizplus · Accepted Answer

This situation is an example of moral hazard. Moral hazard occurs when a borrower has an incentive to engage in riskier behavior because they do not bear the full cost of the risk. In this case, the borrower is using the loan for a non-productive purpose and is taking on additional risk by playing the lottery. This behavior may not have been anticipated by the bank when they issued the loan, and it increases the risk of default.

A Person Takes Out a Car Loan at a Bank