Offsetting Balance (Noun)
Meaning
A minimum credit balance that a bank may require a borrower to keep on deposit as a condition for granting a loan; a common requirement for establishing a line of credit at a bank; "the compensating balance increases the effective interest rate to the bank since the net amount loaned is reduced but the interest paid is unchanged".
Classification
Nouns denoting possession and transfer of possession.
Examples
- The bank required a compensating balance of 10% of the loan amount as a condition for granting the small business loan.
- By maintaining a compensating balance, the borrower can secure a lower interest rate on their line of credit.
- The borrower was required to keep a compensating balance of $10,000 in their checking account to qualify for the loan.
- The compensating balance essentially means that the borrower must keep a certain amount of money in the bank in order to reduce the risk of default.
- Some banks charge higher interest rates on loans that do not require a compensating balance, making it a costly option for borrowers.