An Examination of the Impact of Loan Interest Rates on Borrower Behavior: A Study of UBA, Lagos State
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Background of the Study
Loan interest rates are a critical determinant of borrowing behavior in retail banking. At UBA in Lagos State, interest rate policies directly influence how customers approach loans, affecting their decision-making regarding credit acquisition and repayment. Lower interest rates generally encourage borrowing by reducing the cost of credit, while higher rates may deter customers or lead to more cautious financial behavior. UBA’s dynamic approach to interest rate setting—often influenced by macroeconomic conditions and regulatory requirements—plays a significant role in shaping borrower behavior. In addition to traditional lending products, the bank has introduced flexible loan schemes that adjust to market conditions, thereby offering competitive rates and tailored repayment options. These innovations aim to attract a broader customer base and promote responsible borrowing practices (Okoro, 2023). However, fluctuating interest rates can also lead to borrower uncertainty, affecting repayment behavior and overall loan performance. Understanding the nuances of how interest rates impact customer behavior is crucial for UBA to optimize its lending strategies and manage credit risk effectively. This study examines the relationship between loan interest rates and borrower behavior at UBA, assessing the influence of rate fluctuations on borrowing patterns, repayment timeliness, and overall financial health of customers (Chinwe, 2024; Akinola, 2025).
Statement of the Problem
UBA faces significant challenges in balancing competitive interest rate offerings with sustainable loan performance. Frequent fluctuations in interest rates create uncertainty among borrowers, leading to inconsistent borrowing behavior and sometimes delayed repayments. High interest rates can discourage potential borrowers, while sudden rate cuts may encourage excessive borrowing, increasing the risk of defaults. Additionally, many customers lack the financial literacy necessary to fully understand the implications of variable interest rates on their repayment obligations, which can result in mismanagement of credit and increased financial strain. This volatility not only affects individual borrower behavior but also impacts the bank’s overall credit portfolio performance and risk management practices. As a result, UBA struggles to achieve an optimal balance between attracting borrowers and maintaining a healthy repayment rate. The study aims to identify the key factors that influence borrower behavior in relation to interest rate changes and to propose strategies to mitigate risks and improve loan performance, ensuring a more stable and predictable lending environment.
Objectives of the Study
• To assess how changes in loan interest rates affect borrower behavior at UBA.
• To identify key factors influencing repayment patterns under variable interest rates.
• To recommend strategies for optimizing interest rate policies to improve loan performance.
Research Questions
• How do fluctuating interest rates affect borrowing and repayment behavior?
• What factors contribute to borrower uncertainty and delayed repayments?
• What measures can UBA adopt to stabilize borrower behavior and credit performance?
Research Hypotheses
• H₁: Lower interest rates are positively correlated with increased loan uptake.
• H₂: High interest rate volatility negatively impacts timely loan repayments.
• H₃: Enhanced financial education on interest rate implications improves borrower behavior.
Scope and Limitations of the Study
This study is confined to UBA’s loan products in Lagos State. Limitations include economic fluctuations, varying customer financial literacy, and external market influences.
Definitions of Terms
• Loan Interest Rates: The cost charged by a bank for borrowing funds.
• Borrower Behavior: Patterns in how customers approach loan acquisition and repayment.
• Credit Risk: The risk of financial loss due to borrowers defaulting on loans.
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