Wouldn’t it be more equitable for interest rates to be the same rate for all who purchase new homes?

Question

I have an excellent credit score with less income than my friend. He has and excellent credit score equal to mine. For me to borrow $50,000.00 I am offered credit at 7 – 8 % where as my friend is being offered the same amount at 5 -6 %. This is an amount I can easily afford, but it seems that I must pay the lender more because I earn less.

Don’t credit scores seem to be a way our federal government regulates lending to assure wealthier people get very low interest rates when borrowing money and others must pay a very high rate of interest resulting having less of their income in the end for personal use.

If interest were the same for all income levels and only the amount borrowed be based on ability to pay it back, wouldn't that make it less likely for someone to default on a payment (less interest = lower monthly payment)?

Answer 1

Many things OTHER than credit profiles go into determining rate.... for example: Are you w-2 income, self-employed, stated income? Loan amounts the same? Small loan amounts have a higher interest rate. Type of collateral being used to secure the loan. Owner occupied or an investment property or second home. Percentage of down payment and equity position on the property. Property location; rural, suburban? Depth of credit history. First-time home buyer. Debt to income percentages. As you can see.... it's not just based on credit scores..... and lending institutions MUST be compensated for risk. I hope that this helps.

Answer 2

While I understand your predicament. Being wealthy does not necessarily mean a better credit score. The score is based on payment history first and foremost. Because you earn less the bank, from the past loan histories the ban is thinking that someone in your shoes has a better chance of defaulting than your friend. This is why the rate is higher.
I have seem and met with people making over 250k per year with debt out their eyes and horrible credit scores, and I have also met with people making 45k per year with scores approaching 800. This leads into why if interest rates were the same for us all, the few of us with the better credit scores would be penalized. This would drive interest rates up for all of us.

The beautiful thing is that you have the ability to shop around for your loan. If your credit rating is that good, you can get that lower rate somewhere else!

Answer 3

We have a free market in this country. Its not the government setting the credit ratings, there are 3 independent companies that set the ratings and sell the information.

In a free market, lenders want to be compensated for the risk that they face. If they lend to a risky person, they want a higher rate. People with lower incomes are going to have a harder time paying their loans off.

There are all kind of variations in loans. First, the ability of the borrower to repay varies. Second, the value and safety of the collateral varies. Third, there are all kinds of different deals: fixed, variable, with mortgage insurance, without, with escrow, without escrow, balloon payments, prepayment penalties, high points, low points, etc. You can't really expect the "price" (ie interest rate) of every loan to be the same.

Answer 4

Did you go to the same lender for the loan? Lenders look at several things to determine the rate of all types of loans. First the credit score, second the ratio of available credit vs. amount of credit being used, and ability to pay (stability of the job, employment history etc.)

If any of these issues above are out of place, it means the loan has a higher rate of default. The only way to make up for their losses is to charge a higher rate to those who this applys to. Lenders could care less what color you are, how much you make, what your gender preference is or anything else, is just simply math.

Answer 5

It is all about risk

Equal loan amount = equally great credit scores BUT your friend's income > your income ==> thereby YOU are a greater risk because of your lower capacity to pay the loan and as such HIGHER interest rates

Answer 6

NO. Has nothing to do with wealth ~ it has to do with past credit history !
People with good credit get better rates. People who have abused their credit in the past are a bigger RISK therefore get HIGHER RATES.
It is fare. Why should good creditors PAY for bad creditors?
Think about it.
Shop around maybe you can find a better rate yourself !