The risk of losing money owing to a borrowers failure to repay a loan is known as credit risk. It refers to the risk that a lenders cash flow will be disrupted if a borrower fails to pay principal or interest. When the borrower does not have enough cash flow to pay the creditor or does not have enough assets to sell to repay the creditor credit risk is deemed to be higher. The lender is more likely to demand compensation in the form of a higher interest rate if the risk of nonpayment is greater.
Some mitigating controls are listed below: