Most people take 15-20 years, accumulating enough wealth to pay for a house. If people had to save enough money to pay for an entire house before getting started, they wouldn’t be able to buy one when they need it. That’s the need to borrow money when buying something really expensive – this borrowed money is a loan.
Due to life and circumstance, some people who borrow money will end up not being able to meet the financial obligations they take on – and failing to meet financial obligations is how to earn a bad credit rating. When the borrower has a history of not being able to repay their loans (bad credit), it becomes a very risky decision to loan that person money.
Loaning money to people with bad credit is much riskier than loaning money to people with good credit. Loans to people with bad credit fail more often. To compensate for the higher rate of failure, a higher rate of interest is applied to people with bad credit.
That’s the simple beginning of a long and complex story about credit ratings and interest rates.