Nice Loans.co.uk > News > Loan Rates depend on Risk
The interest rate charged on loans is based on the risk of non-repayment.
Where the risk of non-repayment is lower, then loans are cheaper. As the risk of non-repayment rises so does the cost of the loan. For the most risky cases, where the borrower has a track record of financial difficulties (or adverse credit history), lenders need to charge more interest to cover for those who fail to repay their full debt.
Well that's how things work in the high street, but what about when a bank wants to borrow from another bank? This is quite a common occurrence but normally the risks of non-repayment are extremely low so rates are rock bottom.
Well a strange thing happened this week when the inter-bank lending rate (LIBOR) increased to it's highest relative rate for many years.
That serves to indicate one of two things. Either the banks now have less confidence in each other, in other words they now worry more about getting their money back, or they just don't want to lend out their money, preferring to keep it themselves.
The real situation is probably a little of both factors but more heavily weighted towards needing the money themselves.
With financial markets suffering from a lack of liquidity, arranging a loan has become more difficult and banks that have cash may be choosing to reserve more for their own safety nets rather than offer it out as loans.
Copyright © 2007 Nice Loans - The Cheap Loans Provider
