Borrower repays the loan in full
The cost of a loan is largely composed of the interest that the borrower pays to the lender in return for the transfer of the loaned amount. The amount of this interest is in turn determined by various factors that come from heterogeneous and completely different economic areas. For example, the economic development, in particular the key interest rates of the central banks, has a significant impact on the interest rate of the final loan. In addition to the interest on the loan, the creditworthiness of the borrower also plays a crucial role in determining the amount of the interest. Because the best loan offer is ultimately only possible if the borrower has the appropriate credit rating. This is due to various business considerations at the bank.
Thus, the bank always has a vital interest in repaying the loaned amount, since if it is canceled, despite the fact that interest may still be paid, no economic profit is possible. However, if there is a possibility of the loan amount defaulting, for example due to poor creditworthiness of the borrower, the bank faces two different options. Firstly, it can refuse to grant loans. In this way, there is no loss, but also no profit if the borrower repays the loan in full. On the other hand, it can also grant the loan, with the result that it will make a profit, but only until the time the loan is canceled. Ultimately, the bank will choose a compromise.
Higher interest rates always result in higher repayment rates
This is taking place more and more frequently in the course of the general economic development on the German financial market, which is therefore significantly shaped by the much more risk-taking American market, so that loans with higher risk are increasingly being issued. As a compromise, the bank will now grant the loan, but cushion the increased risk of default by correspondingly higher interest rates. In the case of higher interest rates, the borrower has already paid a significantly higher amount to the bank up to the point in time that a loan default may occur, since the higher interest rates always result in higher repayment rates . The loss to the bank is therefore lower because the borrower paid back a comparatively higher amount before the default.
Furthermore, the risk borrower guarantees the other borrowers with an equally high risk. This is because the bank’s risk-bearing loans are combined into a bundle on the balance sheet. It is no longer the individual loan that has a direct impact, but rather the total number of all risk loans. If one of these risky loans now fails, the bank has to cope with this because the income from the other risky loans compensates for the losses from the loss of one loan due to the correspondingly high interest rates. The bank’s calculation is very simple: the higher the risk of the loan, the higher the interest to be paid. For this reason, only the borrower with a high credit rating can hope for cheap loans.