Credit Risk

A Credit Risk is a risk of a financial default on a debt that may arise from a borrower failing to make required payments.

• See: Collection Cost, Interest Rate, Default (Finance), Principal Sum, Interest, Cash Flow, Mortgage Loan, Credit Card, Line of Credit, Company, Floating Charge, Trade Credit, Market Risk.

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References

2016

• (Wikipedia, 2016) ⇒ http://wikipedia.org/wiki/credit_risk Retrieved:2016-4-29.
  • A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances, for example:
    • A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan.
    • A company is unable to repay asset-secured fixed or floating charge debt.
    • A business or consumer does not pay a trade invoice when due.
    • A business does not pay an employee's earned wages when due.
    • A business or government bond issuer does not make a payment on a coupon or principal payment when due.
    • An insolvent insurance company does not pay a policy obligation.
    • An insolvent bank won't return funds to a depositor.
    • A government grants bankruptcy protection to an insolvent consumer or business.
  • To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance, or seek security over some assets of the borrower or a guarantee from a third party. The lender can also take out insurance against the risk or on-sell the debt to another company. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

    Credit risk mainly arises when borrowers unable to pay due willingly or unwilingly.

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