- Listed: August 12, 2022 2:48 pm
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What is risk-based pricing?
Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans.
This means, for example, that lenders will generally offer a higher interest rate to you if they view you as a higher risk borrower – say, because you recently declared bankruptcy, lost a job, or are several payments behind on a mortgage. For the same exact loan, lenders will generally offer a lower interest rate if they view you as a lower risk – say, because you have a good credit score and are employed.
Each lender uses its own process to determine the risk that you will default on a loan, but most use your credit score, employment status, income, and other outstanding debts, among other factors.
If a lender relied on a credit report in making a lending decision about you, you should get a Risk-Based Pricing notice if you receive less favorable terms than other borrowers based in any part on your credit report. This notice includes information about how to get your free annual credit report, your credit score, the score range, and the negative factors affecting the score.
Lenders may NOT use certain legally prohibited factors to decide whether to give you a loan or how much to charge you, such as your race, gender or age.
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