The decision on whether to default on a loan or debt raises a time consistency problem.

Question

Quizplus · Accepted Answer

The time consistency problem arises because the incentives before and after taking a loan can lead to different decisions. Initially, a borrower may plan to repay a loan to maintain a good credit rating. However, once the loan is received, the borrower might find it more beneficial to default, especially if the immediate costs of defaulting are less than the benefits of using the funds elsewhere. This inconsistency over time between planning and action can lead to a dilemma in decision-making regarding loan repayment.

The Decision on Whether to Default on a Loan or Debt