The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

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The inclusion of a compensating balance requirement in a line of credit will increase the effective annual cost of credit since the borrower will be required to keep a portion of the loan proceeds on deposit with the lender at no interest. This reduces the amount of funds available for the borrower to use and increases the cost of borrowing.

The Inclusion of a Compensating Balance Requirement in a Line