The purpose of this paper is to study the asset substitution problem in a credit market with repeated borrowing. In literature this agency problem between the borrower and the lender has been used to explain various financial phenomena. Applying the con-cept of sequential equilibrium, this study demonstrates that the role of reputation in a credit market can deal with the asset substitution problem without contracting cost. The nature of the equilibrium interest rate is explored and the welfare implication is dis-cussed. Since the agency costs can be reduced in this equilibrium, the explanations based on asset substitution argument need to be examined more carefully.