Credit Risk

The risk that a person or corporate entity will fail to fully pay financial obligations, including principal and interest owed. Also known as default risk.

Example:

Lending money to a friend. There is always the possibility, that despite the best intentions, the funds will not be paid back.

Downside Scenario:

The friend forgets about the loan, you are offended, your relationship suffers, and you grow apart.

Upside Scenario:

The friend takes the money and invests it in a small business. The business takes off, and the friend shares significant financial rewards with you as a warm sign of gratitude.

Related terms:

Bankruptcy Risk

The risk that an individual or corporation may file for bankruptcy, which often leads to losses for creditors.

Find out more at Credit Solutions Demystified.

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