lectur4-page14 - history so you do not have much of a track...

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If you think there is some risk involved in the transaction, then you would naturally want to be compensated for taking that risk. This is where the risk premium enters the interest rate scenario. The greater the risk that you perceive, the greater the risk premium you will want. The interest rate that I may receive from a bank may be less than the interest rate you might receive. I am 40 “something” years old, married, have three children that are grown and are on their own. I almost fully own my home. I have a graduate degree and have been employed as a teacher at N.C. State University since 1981. My credit history is spotless. You may be 18 or 19 years old, single, in college, renting a dorm room or apartment, no children. You really have not had much time to develop a credit
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Unformatted text preview: history so you do not have much of a track record by which to judge your financial responsibility. Basically, you could just pull up stakes and disappear with the bank’s money if you had a mind to and it would be very expensive to track you down You money if you had a mind to, and it would be very expensive to track you down. You lack ties to the community. Who would you charge a higher risk premium to? Who may be charged a higher risk premium by a lending institution? Lenders evaluate the length and quality of an individual’s credit history, the 14 purpose of the loan, the amount of collateral available and it’s liquidity, as well as an individual’s capacity to repay the loan....
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