Recovery Rate

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Definition of 'Recovery Rate'

The recovery rate is the percentage of the principal amount of a loan that is repaid by the borrower. It is calculated by dividing the total amount of principal repaid by the total amount of principal loaned. For example, if a borrower repays $100 of a $100 loan, the recovery rate is 100%.

The recovery rate is an important metric for lenders because it indicates the likelihood that they will be repaid in full. Lenders typically use the recovery rate to determine the interest rate they charge on loans. The higher the recovery rate, the lower the interest rate.

There are a number of factors that can affect the recovery rate, including the borrower's credit score, the type of loan, and the collateral used to secure the loan. Loans with higher interest rates and less collateral tend to have lower recovery rates.

The recovery rate is also affected by the borrower's ability to repay the loan. If the borrower loses their job or experiences other financial difficulties, they may be unable to make their loan payments. This can lead to the loan going into default, which can reduce the recovery rate.

The recovery rate is an important metric for lenders to consider when making lending decisions. It can help them to assess the risk of a loan and to determine the appropriate interest rate to charge.

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