Risk Based Pricing – An Overview

There are plenty of different factors that will have an influence on finances, but one of the most obvious and important is that of mortgages and other loans.  It’s no secret that the burst of the housing bubble and the huge increase in mortgage issues had a major impact on the financial world, from banks and lenders to stock traders.  One of the biggest factors in loans, whether they’re mortgages or other types of loans, is that of risk based pricing.  This term has been used for years to help lenders learn more about just where they’re sending their money and what type of interest should be attached to it.

Basically, risk based pricing is nothing more than the charging of different interest rates on an identical loan to different people.  In other words, one person may face a higher interest rate on their mortgage than someone else who takes out an identical loan.  It’s seen as a type of adjustment based solely on the risk that a lender is taking when they extend a loan, and a number of different factors will influence risk based pricing in one manner or another.  Whether you’re about to take out a loan or are planning on extended one, it’s good to review this process.  And it even affects stock investing, making it all the more important to learn about.

Risk based pricing begins with a background check.  Any lender will likely use a check of this nature to look into things like credit score, employment history, loan purpose, property type and use in the case of mortgages, loan amount, and much more.  While the credit score itself is the primary factor, a number of other issues could contribute as well.  All of the previously mentioned attributes will combine to help a lender learn more about whether or not the credit applicant comes with a higher risk than other applicants may be.

Simply put, if your credit history is poor then you’ll likely face a higher interest rate.  If your credit and financial history are good you’ll experience a better rate and possibly even better terms.  This is because lenders view poor histories as a sign that they may face a defaulting debtor by issuing a loan.  A higher interest rate increases their profit and reduces their risks significantly.  Because of risk based pricing, it’s imperative that you treat your credit score and financial history with the respect that they deserve.

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