A business regularly extends credit to customers for large purchases with a standard interest rate of 5 percent. There is also a $200 installment fee that is added to the total cost of the purchase. A customer applies for credit but has a very low credit score. If the business decides to extend credit, which is most likely?

Question

Responses

The business will drop the fee to make the loan more affordable.

The customer will decide to take the loan out from a bank instead.

The fees and interest rates will be higher because of the greater risk.

The business is legally obligated to offer this customer its standard rates.

Answer 1

The most likely response is:

The fees and interest rates will be higher because of the greater risk.

When a customer has a low credit score, lenders view them as a higher risk for defaulting on the loan. To compensate for this increased risk, businesses typically charge higher fees and interest rates.