uk.finance

"Virgils Ghost" writes:

> Because nobody will be prepared to hold the risk without the requisite
> compensation. Take the current situation in the interbank and CP markets,
> nobody will lend at any cost or only at very harsh terms.

But in the case of a deflationary spiral, is the additional risk
generated by the greater level of default following a rate increase not
higher than the increase in risk which prompted the rate increase?
Otherwise it would not be a deflationary spiral. So the action to
seemingly lessen their 'immediate' risk is in fact increasing their
risk. Therefore the way to minimise the risk is to not increase the
rates and cause more people to default. The lenders will have already
assessed the risk posed by each borrower (or they should have done) at
the current interest rate. So, why not keep the current interest rates
for existing borrowers (who have shown they can keep up with the
repayments at the current rate) and assess the risk posed by new
borrowers and charge interest rates accordingly. All the adverts etc
quote 'typical' APRs, which indicates that rates are already tailored to
the borrowers circumstances and history. Alternatively, instead of
increasing the size of the periodic repayments when the rates increase,
give the borrower the option of continuing with the same repayments (as
long as these cover the interest) and extending the period of the
loan. If the borrower does not default, which (s)he is less likely to do
than if the repayment amount is increased, then this will increase the
profit generated by the loan.