Probability of default
What is probability of default?
It's an estimate of how likely it is that a borrower won't be able to make the repayment obligations on a debt or loan. If a borrower is considered to have a high probability of default, then lenders will probably charge a higher interest rate.
Where have you heard about probability of default?
If you have ever applied for a mortgage or loan your default risk will have been assessed by the lending bank. If the bank thinks you have a high probability of default they will have charged you higher interest rates on your mortgage to cover the risk.
What you need to know about probability of default.
A borrower's probability of default is affected by their credit score or credit rating.
An individual's default risk will be based on their credit score. A credit score is based on a person's credit history, and it takes into account whether bills are paid on time or if there is a lot of debt. The higher the score, the more financially reliable the borrower is considered to be.
Companies are assessed on their credit rating, usually by credit rating agencies like Moody's, Standard & Poor's and Fitch. They look at factors like the company's past borrowing and repayment history as well as the company's future earning potential and market conditions.
Find out more about probability of default.
The FICO score is the most widely used consumer credit score that financial institutions use when deciding whether to lend money or issue credit to an individual.