Reasons Why Bad Credit Equals High Interest

Posted on May 7, 2008
Filed Under Loans Expert |

It is often confusing why lenders would charge higher interest rates to someone with bad credit.  A person with bad credit does not need the higher payments on a Loan that come with higher interest. 

It seems more rational to charge a person with bad credit lower interest so the payments can be more affordable and they are not stuck in the Loan for so long.  However, there is very good logic behind the lender charging higher interest rates to bad credit borrowers.

When a Loan payment is made only part of that payment is paying the actual Loan balance.  The majority of the payment pays the interest and that is money directly in the lender’s pocket.

The lender isn’t stupid.  They know that a person with bad credit is more likely to default on the loan, so they charge higher interest so they can get more money in their pocket right now just in case the borrower defaults.

Now that is smart lending.

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