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Personal loan
The Purpose of Credit Spread in a Loan
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[QUOTE="Holicent, post: 251393, member: 76163"] [FONT=Verdana] A credit spread is the difference between the cost of borrowing money and the return on lending it out. Credit spread is also called the net interest margin. The purpose of a credit spread is to create enough profit for the lender to cover loan costs and provide a return on investment for investors. In addition, lenders may also use credit spreads to manage risk. For example, if you borrow money at 9%, but lend it out at 7%, your profit is 2%. If your customer defaults on payments, you'll still have enough money to cover your losses. Lenders can use different types of loans to manage their risk: Prime loans — The interest rate on prime loans is usually lower than that on subprime loans. Subprime borrowers tend to have bad credit ratings or insufficient income or assets, so they're more likely to default on their payments than prime borrowers are. Lenders may charge higher interest rates because they expect higher risk in subprime loans compared with prime ones. Subprime loans — Subprime borrowers tend to have bad credit ratings or insufficient income or assets, so they're more likely to default on their payments than prime borrowers are. Lenders may charge higher interest rates because they expect higher risk in subprime loans compared with prime ones.[/FONT] [/QUOTE]
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The Purpose of Credit Spread in a Loan
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