Which type of loan generally carries higher interest rates due to increased risk?

Subprime loans are designed for borrowers with lower credit scores or limited credit histories, which typically indicate a higher risk of default. As a result, lenders charge higher interest rates on these loans to compensate for the increased risk they undertake. This pricing strategy reflects the fact that borrowers qualifying for subprime loans often do not meet the creditworthiness standards for more traditional loan products, necessitating a higher rate to mitigate potential losses faced by lenders.

In contrast, conventional loans tend to have lower interest rates, as they are offered to borrowers with solid credit profiles. Home equity loans can vary in rates depending on the equity available and the borrower’s credit, but they generally don’t carry the same level of risk as subprime loans. FHA loans are backed by a government agency, which provides lenders with some security, allowing them to offer lower interest rates to borrowers, particularly those with less-than-perfect credit.