Final answer:
A borrower with bad credit is more likely to be charged a high-interest rate because their history suggests a higher risk of loan default, which leads lenders to increase rates to offset the risk.
Step-by-step explanation:
A borrower with bad credit is likely to be charged a high-interest rate. A poor credit history, such as being late on loan payments, indicates to lenders a higher risk of default, which justifies the higher rates to offset potential losses. Interest rates are a critical cost of borrowing and are used by banks to manage risk.
For instance, if interest rates in the economy have risen, existing loans with lower rates become less attractive, leading lenders to adjust rates accordingly to new borrowers.
Furthermore, a borrower's credit rating, as assessed by agencies like Standard and Poor's or Moody's, plays a significant role in the interest rate they are charged.