I’m asking specifically about people in the U.S. looking to borrow from a lender.
In: 0
It is the price of poverty. Those without lots of money don’t have the leverage to go somewhere else, so the lenders can take advantage of them.
Of note to add to all these other answers is that the greater reward, in a high risk high reward loan, comes out of the pocket of the lower credit scorer directly. And the bank or lender profits more off of the more susceptible person of lower credit score. It’s a system designed to make amassing wealth incredibly difficult.
It’s far more expensive to be poor. It even has a name: the poor (or poverty) tax. If you’re poor, you pay more in interest rates on loans, you pay more for less efficient appliances which means you also pay more in utility bills. You pay more in taxes because you can’t afford to pay accountants who can help find tax breaks and loop holes. You can’t afford more expensive healthier food, gyms and dietitians so you incur more expensive healthcare costs. This list of examples is far too exhaustive to type out. There are so many more examples and a good amount of literature out there about this subject.
When you have a low credit score, it will be assumed you have an elevated credit risk. There’s money to be made from you, and while you’re paying down your loan you’re also paying for the defaulted loans of other borrowers. The lender is taking a chance and they’re going to charge you extra for doing so.
On the flip side of the coin, every lender wants to lend money to someone who always pays their debts off on time, every time. Lender’s are quite willing to compete with other lenders to get the business of someone who is going to make them so much easy money. One of the simplest ways to compete for the business of a ‘qualified’ borrower is to offer them a really attractive interest rate.
It’s not as underhanded as some cynics would want you to believe. The greater the risk, the greater the cost. The lower the risk, the more lenders are competing for your business, the lower the rates they’ll offer.
Everyone is providing super detailed answers but the simple way to explain it is, higher interest rate means the bank get the borrowed money quicker, and now have a chance of making a bigger profit now that the capital is paid
Credit scores show who likely you are to pay off your debt.
A low credit score means it’s high risk for anyone to lend to you, so a higher interest rate means they can recoup their money faster if you do eventually default, and they get a bigger payoff if you do manage to pay it back.
It’s literally just risk vs reward from the lender’s side.
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.
Latest Answers