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It used to be that if you defaulted on a loan, be it secured or an unsecured loan, you wouldn't be able to get new credit—or if you could, you paid insane fees and through-the-roof interest rates. But once the finance industry realized there were big bucks to be made in what is called the sub-prime lending market, that all changed. The sub-prime lending market is made up of people who, for whatever reason, have tarnished credit. It may be something as simple as a few late payments on a credit card to having a car repossessed. Whatever the case, lenders now are more willing to make what are considered high risk loans to this group. Because people with low credit scores are much more likely to default on a loan as those with higher scores, lenders charge up to twice the interest rate they would charge someone with good credit for the same exact loan. This is to compensate the lender for taking the extra risk of lending money to an individual with a low credit score. Statistically, the lender is much more likely to be left holding the bag on a loan when the debtor has a low credit score versus someone with a higher credit score.
|Jennifer Mathes, Ph.D.|