Which type of loan generally has higher interest rates due to a lack of documentation requirements?

Alt-A loans generally have higher interest rates primarily due to their reduced documentation requirements. These loans cater to borrowers who may not meet the traditional lending criteria, often allowing for less verification of income, assets, or employment history. Because lenders perceive a higher risk in loaning to these borrowers, they typically charge a higher interest rate to compensate for that risk.

This risk arises because lower documentation can mean that the lender has less assurance regarding the borrower’s ability to repay the loan. As a result, Alt-A loans serve a specific market segment, but the lack of stringent documentation requirements makes them inherently riskier for lenders, thereby justifying the higher interest rates associated with them.