Credit risk definition

Credit risk is the level of probability that a debtor will not meet the repayment obligations. It is associated with all debtors, including individuals, businesses, issuers of securities such as bonds, or others.

There are a number of factors that are associated with the borrower that lenders consider when evaluating the risk level of extending credit to any borrower, and they differ from an individual borrower to corporations. Typically a credit rating or credit score is produced by a calculation using the various financial and historic information of the borrower.

Whether to extend credit at all is the first consideration by lenders, and then when the decision is made to make a loan, the terms of the loan, such as the interest rate and the term period, is established based on the risk level.