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Originally Posted by Sean Clayden
Typical to the UK. Why is it that banks charge higher interest to those that are financially at risk, surely those that are financially viable should pay higher rates, lower income earners would benefit from lower rates.  |
Because if the borrower is a higher risk borrower, there is a greater risk the bank won't get its money back. So as such, in order to take that risk, they make the interest rate higher so the potential return is greater. Risk is a legitimate parameter in business calculations. It is factored into the estimate return on investment. A greater risk leads a greater prize to be justifiable and in this case it is in the form of higher interest rates.
It's like during hydrocarbon exploration. We might survey an area and find what we think could be a 3 billion barrel field, but various factors lead us to doubt if the reservoir is good. We might assign a risk of 0.3. So our risked reserves are 900 million bbls. Another field might be a piddly 1 billion barrel field, but it looks very likely there's something to be had there. The risk is 0.9 and so the risked reserves are also 900 million barrels.