What does "credit risk" refer to in financial terms?

Credit risk specifically refers to the possibility that a borrower will fail to meet their debt obligations. This means that the lender may not receive the expected principal and interest payments as scheduled, leading to potential losses. In financial contexts, this is a critical consideration for banks, investors, and any entity that extends credit, as the failure of borrowers to repay loans can severely impact profitability and financial stability. Understanding credit risk involves assessing the creditworthiness of borrowers and evaluating factors such as their financial history, income, and economic conditions that may influence their ability to repay debts.