Lenders encounter the ________ problem before a loan is made when they try to distinguish borrowers who are likely to pay back loans from borrowers who are unlikely to do so.

Question

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The adverse selection problem refers to the situation where lenders cannot distinguish between borrowers who are likely to pay back loans and those who are unlikely to do so before granting the loan. This can result in lenders offering loans to risky borrowers, leading to higher default rates and losses.

Lenders Encounter the ________ Problem Before a Loan Is Made