Lending and borrowing are related in that they are two sides of the same coin. You can’t have one without the other. This may seem like an oversimplification, but this idea has deeper meaning related to the responsibility of both the lender and the borrower in creating a lending contract.
Responsible Lending, Responsible Borrowing, and How They Relate
Borrowing Responsibly
It is often asked that just because you can borrow a certain amount, should you? These kinds of questions are related to borrowing responsibly. A lot of the responsibility for the quality of a loan is dependant on the information provided by the borrower. Your Medipro Capital Finance broker will ensure that the correct documents and information are distributed to the lender to ensure your best interests and avoid adverse selection and moral hazard.
Defining Adverse Selection and Moral Hazard
In the field of economics and lending, the terms adverse selection and moral hazard get mentioned a lot. Both of these phrases deal with asymmetric information between the borrower and the lender, which can have large ramifications on the risks involved in a loan. To better understand responsible borrowing, it is good to know what these two phrases mean.
- Adverse Selection – This occurs prior to when a lending contract is agreed on. The idea of adverse selection is that a borrower has an incentive to be dishonest or to withhold information from the lender that would allow the lender to better understand and calculate the risks involved in the loan. For example, the borrower knows more about what the borrowed money will be used for than the lender. Perhaps the money will be used for a high-risk investment, but the borrower tells the lender than the risk is low. It is this kind of asymmetric information that leads to adverse selection.
- Moral Hazard – This happens when the behaviour of the borrower changes after that loan contract is made. This could be something as simple as the borrower using a portion of a remodelling loan to fund a vacation trip. It could also happen when the borrower uses all of the borrowed funds for something different than what was agreed upon in the lending contract.
Helping Avoid Adverse Selection and Moral Hazard
As you can see, a lot of the responsibility of avoiding adverse selection and moral hazard rests on the borrower. To be a responsible borrower, one must be direct and fully honest with any information required by the lender. It is also important that a borrower not change their behaviour after receiving the funds from a loan. The borrower should use the funds in such a way that is consistent with the terms of the lending agreement. This is a cornerstone of being a responsible borrower.
Don’t Over-Indebt Yourself
Another way of being a responsible borrower is not overborrowing. If you are already in debt, it is important to accurately consider if you are capable of taking on more debt. Only borrowing what you need is the safest way to borrow responsibly and to safeguard your financial future. Your Medipro broker will be able to assist you with understanding your financial position and ensure you are borrowing responsibly.
Responsible Lending Practices
As lenders, it’s may be easy to think that the responsibility of ensuring the safety of a loan rest solely with the borrower. After all, they have a lot more control over the information provided to the lender. But it is equally important that lenders practice responsible lending meaning that they understand what the borrower intends to use the funds for and the risks involved in those uses. So how can a lender lend responsibly?
Follow the Law
To make matters easier, there are laws that have been put in place that any Australian credit licensee must abide by to ensure that they are not making unsuitable loans. This is where it is paramount that the proper due diligence is done on the borrower’s background to determine the levels of risk involved in the loan. This is how a lender avoids the so-called ‘liar loans’ that can lead to costly write-offs and losses. These kinds of bad loans are not only costly for the lending institution, but also for society as a whole, as previous financial crises have shown. Your Medipro broker, by law and regulation, has to abide by “Best Interest Duty” (BID) to ensure that loans being applied for are ethically correct and financially responsible. Your best interest is always at the heart of your broker.
Make Safe Loans
Another aspect of responsible lending practices means to make safe loans. Making safe loans doesn’t mean making only low risk loans, but rather to fully understand the risks inherent in a loan and to build a lending agreement to appropriately reflect those risks. This is an important part of responsible lending meaning that it is accurate risk assessment, not risk avoidance, that is the key to lending responsibly.
Tying It All Together
We mentioned earlier that borrowing and lending are two sides of the same coin. That means that the responsibility for the quality of a loan rests equally on both the borrower and the lender. They have to work together to make the terms of a lending agreement adequately reflect the conditions of the loan. This is something that the finance brokers at MediPro Capital Finance take very seriously. We always try to provide the best possible lending services to our customers when providing personal or home loans for medical practitioners. If you’d like to find out more about our allied health or doctor loan offerings, you can get in touch online via our contact form, or call us on 1300 375 626.