When you get a car loan, the lending institution usually sends a check directly to the car dealer. Such a practice
A) helps forestall moral hazard.
B) helps forestall adverse selection.
C) gives rise to moral hazard.
D) gives rise to adverse selection.

Question

Quizplus · Accepted Answer

By sending a check directly to the car dealer, the lending institution ensures that the borrower uses the funds for the intended purpose, which is to purchase a car. This helps to prevent moral hazard, which is the risk that the borrower will use the funds for other purposes or engage in risky behavior because they have no personal investment in the loan.

When You Get a Car Loan, the Lending Institution Usually