What does risk-based pricing adjust based on?

• A. Loan features that decrease default risk
• B. Loan features that increase default risk
• C. Borrower credit scores only
• D. Market interest rates

Answer: (B)

Risk-based pricing adjusts the terms of a loan based on the perceived risk that the borrower will default on their obligations. This means that factors associated with an increased likelihood of default are critically examined to determine loan pricing, including interest rates and fees. When a borrower has characteristics that indicate a higher risk profile—such as a low credit score, a high debt-to-income ratio, or other negative financial indicators—risk-based pricing mechanisms allow lenders to adjust the terms of the loan accordingly.

This approach is essential for lenders as it helps them manage their risk exposure and align the potential financial return with the inherent risk involved in lending to borrowers who might have a higher chance of defaulting. Therefore, examining the features that increase default risk allows lenders to create pricing models that reflect a more accurate assessment of the borrower’s risk.