why are interest rates higher for people with low credit scores?

Question

I’m asking specifically about people in the U.S. looking to borrow from a lender.

In: 0

Answer 1

Lending money is a risk, people with lower credit scores by definition hold higher risk to lend to. In bulk a lender must ensure that they return as much as possible to cover the inevitable losses that daunted loans from other low credit holders will go into. The lower your credit, the higher the interest needed to cover everyone else in your strata. Because it’s likely more defaults will happen at that level than the higher credit holders.

Think of the higher interest as insurance you need to pay into to secure your loan. You don’t like it? Fine, hold off on your loan and fix your credit.