A compensating balance not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower.

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A compensating balance typically requires the borrower to maintain a certain amount of money in their account with the bank. This incentivizes the borrower to maintain a good relationship with the bank and use their services. However, because the borrower is required to hold onto a certain amount of money, the effective interest rate on the loan may be higher than the stated interest rate, which can increase the cost to the borrower.

A Compensating Balance Not Only Forces the Borrower to Be