Which type of loan typically has higher interest rates?

Sub-prime mortgages are designed for borrowers who do not qualify for conventional loans due to a lower credit rating or other risk factors. These loans typically carry higher interest rates because the lender is assuming greater risk. When lending to borrowers with poor credit histories, the potential for default is heightened, and to compensate for that risk, lenders charge higher interest rates on sub-prime loans. This practice reflects the market's perception of added risk in lending to these borrowers, making sub-prime mortgages fundamentally different from more traditional lending options like conventional or fixed-rate mortgages, which are generally more stable and attract lower interest rates.

In contrast, fixed-rate mortgages offer consistent payments over time, while adjustable-rate mortgages may start with lower initial rates that can increase but typically remain lower than sub-prime rates during that initial period. Therefore, it’s the risk associated with sub-prime mortgages that accounts for their higher interest rates, making this option the correct response.