How does a person's credit score impact the cost of a loan?

A person's credit score plays a significant role in determining the cost of a loan, primarily through its influence on the interest rate offered by lenders. When a borrower has a higher credit score, it indicates to lenders that the individual has a history of managing credit responsibly, which reduces the perceived risk of lending to them. As a result, lenders are more likely to offer lower interest rates to these borrowers because they are considered more likely to repay the loan on time.

Conversely, a lower credit score typically signifies a higher risk for lenders. This perception can lead to higher interest rates or even denial of loan applications altogether, making borrowing more costly for individuals with poor credit histories. Thus, a higher credit score directly correlates with a decrease in the cost of borrowing through lower interest rates, making it an essential factor for anyone looking to secure a loan.