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
People with low credit scores are already more likely to not be able to pay back a loan. That’s how they got the low score after all.
From the lenders perspective, not giving them a loan at all is the best course of action. But if you’re going to loan them money, getting as much as possible back from them before they default on their loan and you then having to sell that loan for pennies on the dollar, is better than nothing.
You also want to discourage them from taking out loans unless it’s really really necessary. There are ways to increase your credit score that don’t require taking out a loan. Something like a Secured Credit Card. So if you have a low score, you should be looking at something like that to increase your score and prove that you aren’t a high risk.
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