An additional fee paid by one party to entice the other into entering a loan agreement.

A lender will typically charge a premium on a loan when it considers the borrower to pose a substantial default risk. If your credit rating places you in a higher-risk category for a loan, the lender may only offer you the financing on the condition that you accept the loan with an adjustable interest rate, adjusted at a premium of several percentage points above the prime rate.

What effect does a premium have?

Being asked to pay a premium to enter a loan agreement will make the loan more expensive for you as a borrower, in exchange for the risk that the lender takes in granting you financing. It effectively amounts to the lender stating that it requires additional incentive to provide you with a loan.

Practical Application Example

“ While a loan premium typically takes the form of a higher rate on your loan, there are alternatives to the payment of a premium, such as buying insurance or placing a higher down payment on the loan. ”