Compensating balances increase the APR because the firm must borrow more than it would otherwise need.

Name: Compensating balances increase the APR because the firm must borrow more than it would otherwise need.
Brand: Quizplus
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Question

Quizplus · Accepted Answer

Compensating balances require a borrower to maintain a certain percentage of their loan amount in a non-interest-bearing account with the lender. This means the borrower needs to borrow more than they actually need, which increases the overall cost of borrowing and leads to a higher APR.

Compensating Balances Increase the APR Because the Firm Must Borrow