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Comment by x5n1 | Hacker News Reader

Why do the rich get a better interest rate than the poor?

Because they are lower risk. And really, it's not so much because they are rich, but they tend to be the part of the population with a better record with their credit. If you have good credit and are relatively poor you can still get a low interest rate.

I really don't understand why people don't get this. If you have $100 to lend and want a return on your investment and you had to charge everyone the same interest rate, would you lend it to the person with better credit or worse? Obviously better credit. So if you want to lend to the person with worse credit you are going to charge them more because of their history they will default more. The risk is priced in to the interest rate.

> I really don't understand why people don't get this. If you have $100 to lend and want a return on your investment and you had to charge everyone the same interest rate, would you lend it to the person with better credit or worse? Obviously better credit. So if you want to lend to the person with worse credit you are going to charge them more because of their history they will default more. The risk is priced in to the interest rate.

Because credit isn't an indicator of future repayment (income is more so). The amount of people who defaulted on their home mortgages when they were underwater after the housing collapse who also had good credit prior is not insignificant.

Payment history is a large part in determining your credit score.

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

Credit score is indeed an indicator of future repayment. That's the entire point of it. It's an index score indicating the likelihood a lender will see their return.

Anyway, they defaulted because they were underwater on the mortgage. When you owe 50% more than your home is even worth, bankruptcy looks like a viable option for many people. Same reason lots of people sold their 401k/IRA/investments. Fear has a fun way of becoming self-fulfilling.

Good credit doesn't mean no risk of defaulting; it means less risk. Fewer of the people with good credit defaulted than of those with bad, which is the only thing a credit rating really claims.

Credit rating is explicitly intended to be an indicator of future repayment. That's the whole point of the system.

Interest rate tends to reflect the risk of investment. Rich people are less risky to lend money to than poor people.

It was meant to be a rhetorical question. But yes this is generally true. But they can afford the interest rate much less than rich people (poor people).

Ah, I wondered if you were serious or not. But yes, it's another one of life's cruel injustices that helps money beget money

What someone can afford doesn't necessarily affect the price.

What really affects the price is what someone's best alternative is. If you have no alternatives, you get exploited.

The power of compound interest works both ways. For the rich, It can mean a spiral upwards, as they can exploit the difference in interest rates of different investments to make profit. For the poor, it often means a spiral downwards into greater debt, more frequent defaults and ever higher interest rates.

I believe the better your credit history, the better you look in the eyes of a creditor. Delinquency rates are generally based on your credit score, averaged over many borrowers and allows creditors to make quick decisions.

The more likely you are to pay back a loan, the better your interest rate, as the creditor is assured they will make a complete return on their investment.

When the chance of you disappearing or declaring bankruptcy is high, you are considered high risk and so your interest rate is increased to make up for that risk. At least that is how I understand lending.

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