What Is a Marginal Lender?

A marginal lender is a lender (such as a bank) that will only make a loan at or above a particular rate of interest. Put differently, it is a lender that is willing to make a loan the current interest rate, but will no longer care to make the same loan at any lower interest rate.

Understanding Marginal Lenders

In the free market for borrowing and lending, banks and other financial institutions serve as the suppliers of credit, in the form of loans, made to businesses and individuals. The rate of interest in the market for different types of loans and for different credit risks is determined by supply and demand, just like any other market. For instance, if there is a surge of housing demand, then many more people may be interested in obtaining a mortgage and so interest rates on mortgages may tick up.

A marginal lender is one who is willing to participate in extending loans in a given credit market at the prevailing level of interest rates (or higher); however, they are not willing to issue loans for any interest rate lower than the market rate - even if somebody else might. They are willing to lend "on the margin" but not below that margin.

Key Takeaways

  • A marginal lender is a lender that will only make a loan at or above a particular rate of interest.
  • Put differently, it is a lender that is willing to make a loan the current interest rate, but will no longer care to make the same loan at any lower interest rate.
  • A marginal lender should not be confused with margin lending in securities markets or overnight lending between banks.

Avoid Margin Confusion

A marginal lender should not be confused with a margin lender, which is a brokerage that lends money to investors who wish to make trades with borrowed funds using collateral they already own. Margin trading is risky because it can amplify investment losses.

A marginal lender should also not be confused with marginal lending, which is the overnight liquidity provided to banks through the European Central Bank's marginal lending facility against the presentation of sufficient eligible assets. It is the equivalent of the Federal Reserve's Discount Window in the United States. The interest rate on these loans is called the marginal lending rate, and is one of the three interest rates the ECB sets every six weeks as part of its monetary policy. The two other interest rates are the deposit facility rate, the interest banks receive for depositing money with the central bank overnight, and the MRO rate, which is the cost of borrowing from the central bank for one week.