Asymmetric Information, Collateral and Interest Rate : The Case of Taiwan

This study examined the relationship between the types of borrowers and the collateral and interest rate required in Taiwanese loan market. It was found that 1. The better the borrower's financial circumstances, the lower the interest rate required by the bank. 2. The worse the borrower's financial circumstances, the more collateral the bank requires. 3. Interest rates and the amount of collateral vary significantly between companies that have different financial circumstances. It is evident that in Taiwan, price factors (interest rate) and non-price factors (collateral) play a very important role in loan contract. The financially sound borrower should be offered loan terms which combine low collateral with low interest, and the financially vulnerable borrower should be offered loan terms which combine high interest with high collateral