A friend came into your office and said that his bank was out to kill small busi
ID: 1189866 • Letter: A
Question
A friend came into your office and said that his bank was out to kill small businesses. You asked him what he meant by this remark, and he said that he read an article that said his bank had just loaned $10 million to a major automobile manufacturer at rate of 4 percent, which is less than prime. However, your friend just borrowed $50,000 from the same bank and they charged him prime plus 3 %, or 7.5 %. Your friend has been in business for 2 years, and last year he had a loss of $2,000. How can you explain the difference in interest rate to your friend?
Explanation / Answer
Bank offers different loan rates to different individuals according to requirement. The bank may also follow slab system where rates are lowered with increasing loan amount. This is becuase 4% $50000 may be small but 4% of $10 million is huge amount. Also this might depend on credibility. Companes with large amount of loan would be having great credibility and thus lower risk of default. On the other hand small business may be prone to incurring losses and thus lower credibility.
Therefore the interest rate may vary according to the risk level of borrower.