In which scenario would 'risk-based pricing' be applied?

Risk-based pricing is applied in situations where the interest rates offered to a borrower are based on the perceived risk associated with that borrower's creditworthiness. In this context, a borrower with a high credit score represents a lower risk to the lender, as their credit history indicates a higher likelihood of repaying the loan in a timely manner. Therefore, this borrower would receive a lower interest rate as a reward for their positive credit history, which reduces the lender's risk.

This pricing strategy allows banks to differentiate their lending terms based on individual borrower profiles, creating a more personalized approach to loan offerings. It aligns with the principles of fair lending by recognizing that not all borrowers represent the same level of risk; thus, they should not all be charged the same interest rate.