Final answer:
Inability to pay a loan can result in loss of collateral, credit score damage, and legal action. Banks mitigate risks by requiring cosigners, collateral, and conducting credit checks. A high loan default rate affects banks' financial health and nations or regions can even face economic consequences.
Step-by-step explanation:
When someone cannot cover the full cost of their loan, there are consequences that may include damage to their credit score, loss of collateral, and potential legal action. In the context of home loans or auto loans, if the borrower is unable to make payments, the lender can seize the property or vehicle to recover the outstanding debt. This is often the last resort after other measures, such as loan restructuring or selling the asset, have been considered. To mitigate such risks, banks often require a cosigner, or collateral, and assess the borrower's credit history before approving a loan.
Banks plan for the fact that a certain percentage of loans may default by factoring these into their expense calculations. If defaults exceed expectations, the financial institution may suffer. On a larger scale, too much debt can lead to loss of investor confidence and affect future borrowing capabilities, as seen in cases like Detroit and Puerto Rico where debts had to be restructured or written off.