Higher leverage (a higher proportion of the loan using other people's money) means a smaller change in the asset price puts the borrower underwater, which increases the value of the default option and should make that option expensive for lenders, raising interest rates if properly priced.
causalpending
Speaker
Arnold KlingEvidence Quote
“the more leveraged you are... the small or a change there can be in the asset price that would put you under water so it increases the value of the default option which in theory should make that make the default option expensive for lenders and should cause the interest rate to be higher”
Created: 6/13/2026, 7:04:06 PM
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