Exploring the Risks of Unsecured Loans

A

The significant risks mentioned in the question are typical of payday lending. Therefore, the correct answer is (A) Payday lending.

Payday lending is a type of short-term, high-interest loan that typically involves borrowing a small amount of money (e.g., $500 or less) and repaying it on the borrower's next payday, usually within two weeks. Payday lenders typically do not conduct a thorough analysis of the borrower's ability to repay the loan, nor do they review the borrower's credit history extensively. Instead, they rely on the borrower's income and post-dated check or electronic access to the borrower's bank account as collateral.

The risks associated with payday lending are significant for borrowers. Borrowers with cash-flow difficulties may struggle to repay the loan, which can lead to rollovers or re-borrowing, commonly known as loan flipping. Loan flipping can result in a cycle of debt that is difficult for borrowers to escape. Borrowers with no lower-cost credit alternatives may turn to payday lending as a last resort, which can further exacerbate their financial difficulties.

Furthermore, the minimal analysis of the borrower's ability to repay the loan and minimal review of the borrower's credit history can result in lending to borrowers who cannot afford to repay the loan. This can lead to default, which can damage the borrower's credit score and lead to further financial problems. Additionally, payday lending is often unsecured, meaning that there is no collateral to secure the loan. This increases the risk for the lender, which is reflected in the high interest rates charged to borrowers.

In summary, payday lending is a high-risk lending practice that can be financially detrimental to borrowers. The risks associated with payday lending include cash-flow difficulties, no lower-cost credit alternatives, minimal analysis of borrower's ability to repay, minimal review of borrower's credit history, and unsecured credit.