By Stephen L. Thomas | January 9, 2024 | In
Also known as default probability, default risk is the probability that a borrower won’t pay back debt payments on time. This may include interest payments and principal on loans, bonds, or credit cards. Default risk is a major factor in credit risk and helps lenders determine whether or not to approve a loan. How Default Risk Works Every time a lender gives someone a loan, there is a level of risk involved. Default risk is used to determine whether lenders approved a loan and can also determine the interest rate the borrower gets. When the default risk is high, lenders usually have to pay higher interest rates. This helps to offset some of the risk for lenders. For example, someone with a low credit score who is approved for a mortgage or personal loan may be subject to a higher interest rate than someone with a higher score. The same may apply to other loans like a car loan. That way, if they default on their debt obligations, the lender can still recoup some of the loss due to those higher payments. Default Risk In