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?

Question

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

Answer 1

Since people with bad credit are much more likely to default, the people with bad credit who don’t default have to pay extra to make up for the defaulters. If not, then loaning money to people with bad credit would lose companies money, and they just wouldn’t ever loan money in those situations.