... there is already doubt about their ability to pay back the same loan at a 5% interest.
Another way to think about this is, "If a lender would offer someone with a good credit rating a loan at 5%, why would that same lender offer someone with a poor credit rating the same loan at 12%?"
It's because it's not the "same loan".
The important distinction is that your credit rating determines the interest rate you will receive, whereas your income determines how much you can afford per month (or year).
For example. Based on your income, suppose you can afford to pay $500/month towards a new loan. You wish to purchase a car with a 60 month term. (At 0% interest, the max loan you could afford is a $30,000 loan.)
- If your credit rating is such that you are eligible for a 5% loan, then the max loan amount would be adjusted to $26,500.
- If your credit rating is such that you are eligible for a 12% loan, then the max loan amount would be adjusted to $22,490.
In both scenarios the person is paying $500/month. The end result is that for the person with a lower credit rating, the total amount loaned is reduced, the bank's risk is mitigated, but the ability of the person to repay the loan is not affected.
The difference in this case is that you, the bond buyer, are now the lender and you must assess if lending money at 12% is worth the additional risk based on the lendee's credit rating. As long as you feel the lendee is not spreading themselves too thin based on their income, then it might be an investment worth considering.