Question

To help offset the costs from loan defaults, Chase Bank decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the credit worthiness of Chase's loan applicants is likely to

Select one:

improve.

deteriorate.

be unchanged.

Answer 1

At the first look, there isnt a very direct impact of higher interest rates on the credit-worthiness of loan applicants.

However if we look at the larger picture, the Credit worthiness of Chase's loan applicants will deteriorate. This happens because when the credit score of a loan applicant is high/good the interest rate are also likely to be low for the person and vice versa. But now if our applicants are paying higher interest rate it indirectly conveys that the loan applicants are not that trustworthy. Hence deteriorating the credit worthiness of loan applicants.