Quote:
Originally Posted by Sean Clayden
So, at risk means that you have to pay more, though you can ill afford to. If you can afford it you pay less. Wheres the logic ?
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In plain sight.
Let's exemplify:
Two lenders want to borrow £10,000.
One of them is a low risk borrower with a 99% chance of making his repayments without issue. He gets an interest rate of 10% for his trouble. The gross margin for the lender is £1,000. When risk is factored in, the return is £990.
The other is a high risk borrower with only a 60% chance of making his repayments without issue. He gets an interest rate of 15%. The gross margin for the lender is £1,500. But with risk, this becomes £900.
So in fact, despite the higher interest rate, the risk factor makes the return on investment of lending to the high risk borrower lower. Now imagine if the interest rate wasn't raised to compensate for the high risk. The lender might not feel it economical to lend at all.