Yes, it seems counter-intuitive.
If you have bad credit, you should have to pay a higher interest rate on your loan.
But, it makes sense.
The lender is assuming a higher risk, so he/she should be compensated for it.
Of course, the question is, if you charge a higher interest rate, are you therefore making it even harder for the borrower to pay you back?
I don’t know.
From today’s Globe:
DEAR BOB: When my sister sold her property, she carried back an interest-only first mortgage at 20 percent interest with a balloon payment due in 12 months. The buyer paid for only four months and is now in receivership. What should she do? Is there a time limit to file her claim? Does she need a real estate lawyer? –Roselyn S.
DEAR ROSELYN: I am shocked at that outrageous 20 percent interest rate. Your sister should hire a real estate attorney to file a claim with the property receiver. But I highly doubt she will get paid that unconscionable interest rate.
The borrower paid for four months, then bailed out, leaving the lender in the hole, with little chance of recovery.
Sounds like she didn’t charge a high-enough interest rate.
Source: Let me take that vacant lot off your hands – By Robert J Bruss, Inman News, by way of The Boston Globe (second item)
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