Quote:
Originally Posted by Detector  I'm all for a limit as to what you can buy based on your worth, and thats pretty much the way it is, but to be charged more for the same item based on how much you make just doesn't seem right. |
I don't think anyone is charged more for the item.
I think they are charged more for financing the item if the risk of defaulting is higher based upon past credit.
It's really all market driven.
EXAMPLE:
Enron borrowed money to stay afloat in it's final days. The companies who loan them money sell "High yield" bonds to back the loan, also known as "junk" bonds. Enron pays the finance company an interest rate of around 18%-30% because that is the best rate they can get in order to get the money they need to "turn things around". The likely-hood that they would actually "turn things around" was slim, thus an "increased risk". Obviously, they defaulted on the loan, leaving the creditor and those who bought the high yield bonds holding the bag. But they had little choice, because no lender would loan them money at prime rates based upon their balance sheet and their low probability of repayment.
Now, every now and then, those situations work out, and the company actually turns things around. Those holding the bonds make out great. But more times than not, past behavior dictates future behavior and to break even, the lender must get a higher return on loans made with higher risk. A higher percentage of these loans default than say, loans to GE or AT&T, or other companies with good credit. For prime loans (loans to companies/individuals with good credit) less return (interest) is needed to compensate for defaults. Defaults cost money. Believe it or not the bank does not want your house. It costs them big bucks to repossess a home, fix it up and resell it.
It's not done to punish or keep a person in debt. Its not done to reward those with good credit- its a natural effect of market dynamics...economics.
Also, people with bad credit drive the interest rate up by continuing to borrow at extravagant rates. If they wouldn't borrow at those rates, the rates would fall, also based upon market dynamics.