Lenders generally want borrowers to agree to invest prudently, yet once a loan is made borrowers may use the funds in a highly risky fashion. This leads to the problem of

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This leads to the problem of moral hazard, which is when one party takes risks because they know the costs will be borne by another party. In this case, borrowers may take on riskier investments because they know the lender will bear the loss if the investment fails.

Lenders Generally Want Borrowers to Agree to Invest Prudently, Yet