The efficiency of secured lending

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This document is a fully wrtiien essay about the efficiency of secured lending.

Extraits

[...] Nevertheless, the use of a guarantee may also introduce new inefficiencies in credit allocation. Indeed, securing a loan leads to less risky investment, so financial analysts devote less time to screen opportunities financed by secured loans. Then, this can create an adverse selection problem in investment choice: secured projects would be more eligible to financing than unsecured ones, even if the secured project creates less value than the unsecured one, because it is based on risk and time valuation. Rajan and Winton highlighted in 1995 that this behaviour from financial analysts could lead to too few monitoring with respect to what is optimal. [...]

[...] Essay The efficiency of secured lending A secured loan obliges the borrower to give the lender a physical guarantee as an insurance such as a car or a house. If the borrower defaults on the loan and cannot pay it back with money, the lender is allowed to seize the collateral to pay its investment back, in a secured loan. However, if the selling of the collateral does not pay completely back the loan, the borrower will still owe the lender the difference due to the lender. [...]