But rich people get to pay less interest?
The whole point of poor people getting a loan is because they are POOR.
If you have poor credit, most banks are not even going to loan you money. The ones that will are those that specialize in loans to poor credit people. Because people with poor credit are a higher risk of not paying back the loan, they charge higher interest to compensate. They are in business to make money so they can continue to loan money out. The more people that don't pay back the money they borrowed, the higher the interest rate they charge.
So even if you are a low income person with poor credit, and you have every intention of paying back the loan, you will be paying for all the other people that have not paid back their loan, either through bankruptcy, discharge, or statute of limitation.
I understand your point and agree with it. Heck if the rates were lower then for sure you'd pay it back. It's a certain mentality those who put the policies in place have. Same reason when you buy food on credit that they tax it (if you pay cash/check they don't charge tax on most food you buy) and then charge interest on it. Same as the rent-to-own places and buy-here-pay-here car places, they want you to pay $100 a week on a car ($400 a month when if you had the money to buy it your monthly payment wouldn't be perhaps $250 a month for a nice sedan). The answer is to eat beans and rice until you get everything paid off and then use cash and checking and watch where you buy. Know that working only on a cash basis saves you from paying interest and fees but it does not build credit therefore you probably won't ever own a home or be able to get furniture or a car. These are the reasons we do what the banks say, so we can eventually get the things we want. I guess they expect poor people to get grants for school and educate themself and get themself a good paying job and a career.
And poor people are less likely to pay back the loan - by placing the bad credit risks all one category, the lender can charge the higher interest to cover losses. Since better off people may also have better credit, that shows they are a better risk and more likely to pay back the loan, those the lender faces fewer losses from this group so they do not need to charge as much to cover these losses. Lenders are in business to make money - if they charge the lower risk people more in interest, they will go elsewhere and the lender will make less money, putting even more pressure on them to raise the interest rates of the poorer risks.
Simplified - two groups, poor risk (your poor) and good risk (your better off). Bank lends $1,000 to 100 of each (Total $100,000 to each group). Bank just wants to break even. Poorer risk has a 5% chance of default while the well off have a 2% chance (based on past credit history). Lender lose $5,000 on the poorer risk group and $2,000 on the better risk group - banks has to recoup that money so charges the poorer risk group a higher interest rate.
Actually banks also comes under the business category, Giving loans to Poor credit people means taking high risk, So bank thought if we offer high interest rate, may be they will leave instead of taking loan.
Poor people with bad credit are high risk, and that's why they are charged high interest rates
as the chances of them paying the loan in full are lower
Banks are not charities. They charge interest based on the risk. Poor people are less likely to repay a loan.
Poor credit means there is a much higher chance of that person not repaying the loan. That is compensated by a higher interest rate.
Let's say you had two friends, one always pays back what they borrowed and the other sometimes does, sometimes doesn't, sometimes it takes several months before you get paid back. Who do you want to lend money to?
http://www.bankrate.com/finance/credit/c...
Companies don't lend you money simply because you need/want it. They lend it to make money which means they need to weigh the interest they earn versus the chance of not being repaid. An unpaid loan means they need to have a lot of other loans just to cover that one bad loan.
Being poor does not determine an interest rate as credit score does. I know of many lower income families that have good to excellent credit scores because they live within their means. By that I mean they have low balances on loans and credit cards and pay their bills on time. Income has no direct affect on one's credit score as that is based on credit alone.
Because banks are businesses - they're not there to help people, their goal is to make a profit. And the higher the risk (in this case, of the debtor defaulting), the higher the interest they (have to) charge in order to not loose money (over the average of all credits handed out).
It is simple everyone charges more for higher risk, or if they are smart refuse to take the risk as it is way too high. Now poor people should not borrow money ever.
