Credit Risk

Credit risk is the possibility that a borrower may fail to repay a loan or meet contractual obligations, leading lenders to lose money. This risk can affect banks, investors, and businesses when they lend money or extend credit. To manage credit risk, lenders assess a borrower's creditworthiness by examining their credit history, income, and financial behavior. Higher risk borrowers may face higher interest rates or stricter loan terms to compensate for potential losses. Understanding credit risk helps ensure responsible lending and borrowing practices, safeguarding both lenders and consumers in financial transactions.