Highest Risk Premiums On Loans By Country
Every lender is always looking to minimize their rate of risk when issuing a loan. This is why loans come with high interest rates, the amount of interest a borrower pays is usually based upon what is known as the risk premium, a premium charged for the lender for taking on the risk of the loan.
The risk premium differs from country to country, with some countries having higher premiums than others. In this article, we will take a look at the countries with the highest risk premiums on loans.
What Is a Risk Premium?
A risk premium is the amount of interest a borrower pays for taking out a loan due to the risk of the loan to the lender. Lenders will charge a higher rate for a loan that is viewed as more risky, such as those with poor credit histories or those with a higher chance of default. The risk premium is calculated based upon the amount of risk associated with the loan, the amount of money being loaned, and any other factors the lender may decide upon.
The risk premium is also used to calculate the cost of capital for businesses, which is the cost of borrowing money in order to finance their operations. The higher the risk premium, the higher the cost of capital.
What Are the Countries With the Highest Risk Premiums?
- Greece
Greece has the highest risk premium on loans of any country, with their premium rising as high as 13.7% in 2017. This is due to the country’s high levels of public debt, weak economy, and its long history of political and financial instability. If a borrower is looking for a loan in Greece, they should expect to pay significantly higher interest rates than in other countries.
- Portugal
Portugal is another country with a very high risk premium on loans. In 2017, the premium reached 11%, one of the highest in the Eurozone. This is due to its large public debt, fragile economy, and its previous financial crisis which left it in a vulnerable position.
- Italy
Italy has a risk premium of around 10%, making it the third highest in the Eurozone. The Italian economy has struggled since the financial crisis of 2008, leading to high levels of public debt and a weak economy. This has caused a lot of instability in the Italian banking sector, leading to borrowers facing higher interest rates when seeking out loans.
- Spain
The risk premium for loans in Spain is around 8%, making it the fourth highest in the Eurozone. The country suffered significantly during the financial crisis of 2008, leading to a weak economy and high levels of public debt. Spanish borrowers will have to pay higher rates when seeking out loans.
- Slovakia
Slovakia’s risk premium is around 6.5%, putting it in the top 5 countries with the highest premiums in the Eurozone. The country’s economy has been in a state of flux since the financial crisis, leading to high levels of public debt and instability in the banking sector. As a result, the cost of borrowing money in Slovakia is high.
- Ireland
Ireland’s risk premium is around 5%, putting it in the top 6 countries with the highest risk premiums in the Eurozone. Ireland’s economy suffered during the financial crisis, leading to a weak recovery and high levels of public debt. Borrowers in Ireland should expect to pay higher interest rates on loans due to the higher rate of risk.
The risk premium on loans varies from country to country, with some countries having higher premiums than others. Greece has the highest risk premium in the Eurozone, with the premium reaching 13.7% in 2017. Portugal, Italy, Spain, and Slovakia also have high risk premiums, ranging from 11% to 6.5%. Finally, Ireland has a risk premium of around 5%.
If you are looking to take out a loan, it is important to be aware of the risk premium in your country as this will determine the amount of interest you will have to pay. Understanding the risk and ensuring you have the resources to make your payments can help to keep your interest rates lower.
