ElI5: What is the financial logic behind charging higher interest on loans for people with low credit scores? Doesn’t increasing the price like that make low credit individuals even less likely to repay the loan?
In: Economics
In addition to all of the excellent comments, the interest rate charged to people with poor credit scores is based on these factors, too:
* Even if you default, you probably won’t *instantly* default,
* if it’s a secured loan, the lender will recover *some more* of their money (eventually), and
* rate determinations are based on statistics (essentially, actuarial tables); they’ll lose money on some defaulted loans, but make it up on other loans that are paid back in full.
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