The risk that a person or corporate entity will fail to fully pay financial obligations, including principal and interest owed. Also known as default risk.
Example:
Lending money to a friend. There is always the possibility, that despite the best intentions, the funds will not be paid back.
Downside Scenario:
The friend forgets about the loan, you are offended, your relationship suffers, and you grow apart.
Upside Scenario:
The friend takes the money and invests it in a small business. The business takes off, and the friend shares significant financial rewards with you as a warm sign of gratitude.
Related terms:
Bankruptcy Risk
The risk that an individual or corporation may file for bankruptcy, which often leads to losses for creditors.