Credit Risk

Short Answer
Credit risk is the potential for loss resulting from a borrower's failure to repay a loan or meet contractual obligations.

Credit Risk

Definition

Credit risk, also known as default risk, represents the possibility that a borrower will be unable to make required payments on their debt. This risk is a critical factor for lenders when assessing loan applications. High credit risk means there is a greater chance that the borrower may default, leading to financial loss for the lender.

Credit risk is influenced by various factors, including the borrower's credit history, current financial situation, and the economic environment. Lenders use credit scores, financial statements, and other metrics to evaluate and manage this risk. To compensate for higher credit risk, lenders may charge higher interest rates or require collateral.

Credit Risk

Examples

  1. A bank evaluating the creditworthiness of an applicant for a personal loan.
  2. An investor assessing the risk of purchasing corporate bonds from a financially unstable company.
  3. A mortgage lender analyzing the credit risk of a potential homebuyer.

Credit Risk

Further Reads

Further Reading:

  1. Understanding Credit Risk - Investopedia
  2. Credit Risk Management - The Balance
  3. Methods to Mitigate Credit Risk - Bankrate

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