Business Irish

Saturday 3 December 2016

Interest rate charged by banks can often vary, depending on credit risk

Published 03/06/2015 | 02:30

Without knowing the details of Mr O’Brien’s borrowing agreement, we can say little with authority. But it would hardly be surprising to find he has been paying a low rate of interest
Without knowing the details of Mr O’Brien’s borrowing agreement, we can say little with authority. But it would hardly be surprising to find he has been paying a low rate of interest

Without knowing the details of Denis O'Brien's dealings with IBRC, it is close to impossible to discern whether there was anything unusual in the businessman's relationship with the bank.

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TD Catherine Murphy seems to be exercised by what she claims were low interest rates charged by IBRC on loans extended to Mr O'Brien - who has major interests in the telecoms business as well as a large shareholding in the publisher of this newspaper.

We don't know whether her information is correct but it is fair to say that low interest rates are not, in themselves, unusual or a source of concern.

Banks routinely charge customers different rates for similar services.

That's because customers represent different levels of risk and also reflect the fact that some customers are more skilled at negotiation than others.

A customer offering high- quality collateral or borrowing a small percentage of his investment will usually pay a much lower rate than a customer who represents a high risk.

Sometimes, it helps to remember how banks lend to home buyers when thinking of corporate loans.

Your mortgage will always be lower if you put up a large deposit yourself.

Another big divide for home buyers is the divide between trackers and variable mortgages.

The same distinction applies to corporate loans. Many business loans are made at fixed rates but it is also common for companies to borrow at a rate that is a certain percentage above average bank borrowing costs. At present, that rate is negative.

Without knowing the details of Mr O'Brien's borrowing agreement, we can say little with authority. But it would hardly be surprising to find he has been paying a low rate of interest, if the cost of borrowing is linked to a tracker-like device, since borrowing costs began to fall to historic lows several years ago.

Irish Independent

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