What is a Default Risk?
A default risk is defined as the possibility that a borrower will not be able to pay back the principle or interest associated with a loan. Banks often assess the default risk of a potential borrower before lending funds. The loan, if it is determined to have a high risk, may carry a higher interest rate or may be denied altogether. In a secured line of credit, such as a home or car loan, the default risk is very important, but the lender also has options should the borrower be unable to repay. A home can be foreclosed on and a car can be repossessed, in the event of a loan default. However, this process is usually very labor intensive and can cost thousands of dollars to complete. In many cases, the lender may not get the full value of the loan repaid, but recovering at least a portion of the losses is a priority. The biggest default risk involves unsecured lines of credit, such as credit cards. With an unsecured line of credit, it may be impossible for the lender to get back much of
