What factor contributes to subprime lenders charging higher interest rates?

Subprime lenders charge higher interest rates primarily due to the greater risk associated with borrower defaults. Individuals who seek subprime loans typically have lower credit scores, which indicates a higher likelihood of defaulting on their obligations. These borrowers may have a history of missed payments, bankruptcies, or other financial difficulties that make them less reliable in the eyes of lenders. To compensate for this higher risk, subprime lenders increase interest rates as a way to protect their investments and maintain profitability. The increased cost mitigates potential losses that could arise from defaults, making it a necessary tactic in subprime lending practices.

Larger loan amounts, lower credit risk, or government regulations do not underlie this rationale. Larger loans typically involve their own unique risk assessments and pricing structures but are not the root cause for the heightened rates in subprime lending. Lower credit risk would imply borrowers are more reliable, which is the opposite of subprime lending conditions. Government regulations can influence lending practices, but they do not directly explain the reason for heightened rates charged by subprime lenders.