Credit risk may be an individual analysis of someone's own personal financial history, health, and future. In some cases, a credit risk assessment can be a calculation that is achieved using an online tool. An assessment can also be assigned to a potential borrower by the lender. They allow the lender to gauge the likelihood that a loan will be repaid. Also, an investor might make a credit risk assessment before taking a chance on financial securities.
There are different behaviors and criteria that can be used to arrive at a credit risk assessment. Some of those patterns include timeliness in making mortgage payments. The more frequently that a debtor is late on a mortgage loan or any other house payment, such as rent or a second mortgage, the more heavily this component weighs on a credit risk assessment. Other factors that influence an individual's credit risk include personal bankruptcy filings, foreclosures, or liens against property or other assets. All of these components might be entered into fields on an online calculator in order to quantify credit risk.
An individual with the highest return on a credit risk assessment is the most likely to receive loan financing at the most attractive interest rates possible. Salary and other revenue streams also influence the type of loan that may be obtained. Someone scoring in the middle of an assessment might be awarded a loan but may have to pay a higher rate of interest. A person who scores at or near the bottom of the risk assessment spectrum may not be able to obtain financing at all.
In the stock market, an investment into bonds is often considered a safe, conservative way to direct money. High-quality, investment-grade bonds, as rated by outside ratings agencies, are among the safest investments. There are risky bonds, however, and subsequently, assessing the risk of these debt instruments before investing is recommended.
High-yield bonds pay higher interest rates than traditional bonds, but issuers also have a greater risk of defaulting on loans. Third-party ratings agencies assign grades to bonds issued by corporations, governments, and municipalities, and analysts can make changes to those ratings as appropriate. Investors can better understand the type of risk that a bond carries by finding out the rating assigned to the debt. Also, risk can be assessed by reading any public regulatory documents that a bond issuer might file, such as a prospectus, with a governing body in a region.
