So the question is, Why Do People With Bad Credit Get High Interest Rates? I hear this so often that I feel Like I will never be able to get the message through.  People also say not to go a dealer for your auto loan because they will scam you with a high interest rate.

I’m not sure how the the idea that dealerships can sucker people into high interest rates got started.  This idea though is at minimum, outdated.  Sure their are dealerships that are not on the up and up, these days, with all of the regulations though, it is hard for a dealer to do shady business, but this almost never carries over into the loans for one very important reason.  Unless the dealer is a buy here pay here dealer, they don’t have much control over your interest rates.  A dealer may be able to assist in getting you a lower interest rate or advise a certain vehicle situation that will make your deal work better but rates are set by the lender that they go through.  Lenders will place you in a risk category based on your history, employment, income and other factors.  The lenders do not want an interest rate that’s too high.  Rates that are too high will, one, put them at a disadvantage when competing for your business with the other lenders the dealer uses, and two, make the loan unaffordable and cause higher rates of default.
Would it make sense for a lender to do something that causes higher default rates?  I think not.  Yes, I’m sure that it’s no fun to have a higher interest rate with bad credit.  If you have bad credit you do not qualify for the best rates, how could you?  Like I said before your interest rate is set by the lender based on risk, they put you into the lowest risk category possible so they can secure your loan.  Investors borrow the lenders money by investing, these investments are also based on risk.  Since the investors borrow the money at higher rates, it would be impossible to lend the money to the buyer at a lower rate.