How is credit risk typically assessed?

Credit risk is primarily assessed through the analysis of the borrower’s creditworthiness. This involves evaluating various factors that can indicate the likelihood of a borrower being able to fulfill their debt obligations. Key elements considered in this assessment include the borrower’s credit history, which provides insights into their past borrowing behavior, payment history, and any defaults or delinquencies. Additionally, lenders may review the borrower’s current financial situation, including income, existing debts, and assets, to gauge their ability to repay loans.

In the context of lending, understanding a borrower's creditworthiness is essential, as it helps to mitigate potential losses from defaults. An accurate assessment allows lenders to make informed decisions about whether to extend credit, how much credit to offer, and at what interest rate. This focus on the borrower's ability to meet repayment terms directly addresses the essence of credit risk, distinguishing it from other considerations such as market share or competitive pricing, which are not directly related to the risk of financial loss from borrower default.