Credit Risk Mitigation Techniques

Credit risk mitigation techniques are strategies used by lenders to reduce the chance of losing money when borrowers fail to repay loans. Common methods include requiring collateral, where borrowers pledge assets that can be seized if they default; diversifying the loan portfolio to spread risk across various borrowers or sectors; and using credit derivatives, financial contracts that transfer risk. Additionally, thorough credit assessments help lenders understand borrowers' ability to repay. These techniques help ensure that both lenders and borrowers can manage financing responsibly and enhance financial stability.