Tag: Loss Severity

Why Smaller Loans Can Create More Risks For Banks

Loan Profitability

Most banks feel comfortable making smaller sized loans. The obvious reasoning is that a smaller loan will present less of a loss should it go into default - less of a loss means less risk, and, therefore, higher return.  That reasoning could be faulty and could end up getting your bank into trouble as often times it is the larger loan that presents less risk. There are three reasons for this. First, the acquisition cost of a larger loan is just slightly more from a dollar value perspective (and lower on a percentage basis) than that of a small loan.

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