Consumer loans can be arranged in a similar fashion if the lender collects a share of future income instead of interest payments. For example, some people are eligible to arrange for income-based repayment of federal student loans. If the borrower has relatively low income after they graduate, their initial loan payments are reduced, and their monthly payments increase over time as their income grows. The repayment term may extend longer than the usual 10 years under this system, but some of the debt may be forgiven if the borrower's income remains relatively low over time.

Suppose banks extend this approach to other forms of consumer credit like auto loans. Would this be a reasonable way to help borrowers handle income disruptions like lay-offs or temporary reductions in their normal hours? Would there be any problems with the income-based repayment scheme when applied to consumer credit? Would you prefer this system?

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Extending the incomebased repayment approach to other forms of consumer credit such as auto loans can be seen as a potential way to help borrowers handle income disruptions However there are several f... View the full answer