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Benchmark Lending

Updated on February 1, 2011

Benchmark lending. If you decided to borrow money from a friend, whould you expect a friend to lending the money from someone else to further lend to you? Confusing? Sounds strange doesn't it? Well when you borrow money from a bank this is quite often the case! The difference is business. Like in any business, and Benchmark lending, it's a numbers game.  The sale price - cost of goods usually equals profit.  Since banks don't have an unlimited supply of money, they will often lend an amount of money, with an interest rate higher than the rate they pay themselves.

So......  What is Benchmark Lending?
Let's look at the dictionary:

Benchmark -
any standard or reference by which others can be measured or judged: The current price for crude oil may become the benchmark.

Lending -
to grant the use of (something) on condition that it or its equivalent will be returned.

Put the two together? You've got a loan that is somewhat of a benchmark. To be more specific, the interest rate the bank pays on the money its borrow to lend to you, is called  Benchmark rate. making the process of borrowing this money - Benchmark Lending.

What does Benchmark Lending mean to you? When benchmark lending the benchmark rate can directly affect the interest rate the banks charge when lending to you.  The benchmark rate can be a deciding factor with  interest rate movement.  If the Benchmark lending rate shoots up, so will your interest rate to compensate and protect the banks profit margins.

This may seem like a bad thing to be "re-borrowing" money but it keeps the banks lending money and enables more growth for the economy.  Benchmark lending has been happening for years and without it the massive advances in our lifestyle would probably be on hold as money would circulate less, meaning a slower progression in industry and economy. it seems Benchmark Lending is here to stay, for the better!

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