Loss Given Default (LGD)

Loss Given Default (LGD) is a measure used by lenders to estimate the amount they might lose if a borrower defaults on a loan. It represents the portion of the loan that the lender cannot recover after taking into account collateral, recovery efforts, and other factors. For example, if a borrower defaults on a $100,000 loan and the lender recovers $40,000 through collateral sale, the LGD is 60%, reflecting the expected loss relative to the original amount. LGD helps banks assess risk and set appropriate lending terms.