Credit Risk
What Does Credit Risk Mean?
Credit risk refers to the potential for financial losses if a borrower is unable to repay a loan. Lenders use credit risk to evaluate whether a borrower is a reliable investment. The higher the credit risk, the higher the interest rate lenders typically charge to offset the risk of losing money on the loan. In the context of insurance, lenders can also purchase various types of insurance to reduce their financial exposure in the market.
Insuranceopedia Explains Credit Risk
If lenders did not assess credit risk, they would be unable to determine which borrowers are safe investments and which pose a higher risk. This could lead to significant financial losses from making risky loans. To avoid such losses, lenders evaluate credit risk to screen potential borrowers. A higher credit score and a stable income generally indicate a lower credit risk, significantly increasing the borrower’s chances of qualifying for a loan.
