Consumer Loans
In U.S. consumer loans, particularly home mortgages, a yield spread is the difference between the interest rate actually paid by the borrower on a particular loan and the (lower) interest rate that the borrower's credit would allow that borrower to pay. For example, if a borrower's credit is good enough for a lender to make a loan at 6.0%, but the borrower actually takes out a loan at 6.5%, the 0.5% difference in the interest rates is the yield spread.
As the lender earns additional interest on the loan without assuming additional risk (the borrower's credit is the same), this is a source of additional profit for the lender. In order to encourage loan brokers to find borrowers who will pay yield spreads, lenders typically offer yield spread premiums to the brokers who bring them loans with yield spreads.
Read more about this topic: Yield Spread
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