Question

What are some ways that someone looking for a loan might reassure a bank that is faced with imperfect information about whether the borrower will repay the loan?

Short answer

Issues with a bank making a loan to a borrower in the event of incomplete information, such as how the borrower will repay the loan, and the ways can include a source of income, security, and property, which the bank can reassure.

Step-by-step solution

Step 1.: Definition of bank loan.

A bank loan is a type of credit that is frequently granted for a certain length of time, usually on fixed-interest terms tied to the base rate, with the principle repaid in regular installments or in full on the redemption date.

Explanation of solution.

When someone applies for a loan, the bank guarantees that the borrower will return the loan. The question now is how the bank will guarantee the borrower in the event of incomplete information.

Before a bank offers a loan in the financial capital market, the borrower must fill out a form detailing their source of income, previous borrowing history and credit limitations, identification evidence, and statements from other bank accounts. Another piece of information is the requirement of a cosigner on loan documents. A cosigner is a person or company who guarantees to repay the loan if the borrower fails to do so. Another strategy is to force the borrower to pledge property of any type, which the bank has the right to take or sell if the borrower fails to repay the loan on time.