Which loan type typically carries a higher interest rate due to increased risk?

Subprime loans are designed for borrowers who have lower credit scores or insufficient credit history, which increases the risk for lenders. Because of this elevated risk, lenders typically charge higher interest rates on subprime loans to compensate for the potential of default. The rationale behind this higher interest rate is that lenders need to protect themselves against the financial risk associated with lending to individuals who may be less likely to make timely payments.

In contrast, conventional loans generally adhere to stricter credit requirements and therefore carry lower interest rates, reflecting the reduced risk. FHA loans are government-backed and often have lower rates because they are designed to serve borrowers with lower credit scores and require lower down payments. VA loans are also backed by the government and typically offer competitive interest rates to veterans and active-duty service members, reflecting their low-risk profile.