Someone with lower credit (~600 or under) easily gets a "penalty" of >10%.
It's not a penalty, it's a higher charge because people with lower scores are more likely to default on their loans.
If you are a young then your score relies heavily on your parents, and while the young person may have done nothing wrong personally, they immediately start life with a lower credit score because of the parents' mistakes.
This is completely false. Your credit has nothing to do with your parents. Your loan rates will have nothing to do with your parents UNLESS they cosign a loan for you. When you start out, you simply have no credit record, and yes, that means you're viewed as riskier.
Also, the key word is compounding interest.
Thanks. I first unlocked the mysteries of compound interest in elementary school. It's not as nefarious as you think.
The on-paper rate might be 15-20% or even lower, but since the interest is then added to the balance when calculating the next interest payment, you're paying interest on interest, making the effective rate numbers like 30% or higher. So even if you pay all of your minimums, the interest can still go up!
A 15% APR compounded daily is 16.1798% effective. 20% is 22.1336%. What you're describing has nothing to do with compounding, it's called negative amortization. I often think that should be illegal.
My wife had a private loan that compounded daily.
This is actually pretty normal, and as I posted above, doesn't have a huge impact on loan rates. Personally, I don't think anybody's trying to screw anybody here, it's a pretty natural consequence of figuring out how to charge interest. If I charge you X% at the beginning of the year, I'm charging you for a full year of borrowing money when you don't borrow all of that money for a full year. You pay some back each month. I can charge you 1/12th of the interest every month (compounding monthly), but not all months have the same length, so that's not quite right. The thing that works and is always correct is compounding daily.
There's even a thing called continuous compounding that reduces that compounding interval to zero, but it doesn't have much effect at all on the rate. 15% compounded continuously is 16.1834% vs 16.1798% for daily compounding.
Predatory lending is definitely a thing and should be stopped, but predatory schooling is the problem in this case. Institutions that offer valueless degrees while lying about the value of those degrees for a lot of money are a problem. Lenders, federal or commercial, who give people money to spend on valueless degrees with no regard for whether they'll get the money back are a problem, too, and should be stopped. Yes, that means some people aren't going to college, but that beats the heck out of sending those people to college for $100,000 that isn't actually worth $100,000.