What is credit risk?
Credit risk is the chance of loss when a borrower fails to pay principal or interest as agreed.
Definition, calculation and mechanism
Lenders examine income, cash flow, collateral and payment history, none of which predicts the future perfectly. Concentration in one industry increases common-shock risk. Collateral value may fall during stress.
Interpretation, examples and limits
A high rate may reflect risk but does not make a bad loan sound. Delinquency, expected losses and realized losses differ. Borrowers should evaluate repayment capacity and total cost.
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