Question
How does the level of risk associated with a borrower affect the inter 1. The higher the risk, the lower the interest rate 2. The higher the risk, the higher the interest rate 3. Risk does not affect the interest rate 4. Interest rates are fixed regardless of risk
Solution
4
(291 Votes)
Anika
Master ยท Tutor for 5 years
Answer
The correct answer is **2. The higher the risk, the higher the interest rate.**Here's why:Lenders charge interest as compensation for the risk they take in lending money. A higher-risk borrower is more likely to default (fail to repay the loan) than a lower-risk borrower. To compensate for this increased risk of loss, lenders charge higher interest rates. This higher rate is meant to offset the potential losses if the borrower defaults. Conversely, lower-risk borrowers are seen as safer investments and are charged lower interest rates.