Credit risk, what is it?
Life is often unpredictable. Sometimes small events are enough to give everything a completely new direction. Sometimes you cannot manage this new direction with your own resources. When such a situation arises, many people think of a loan. You quickly get a certain amount of money and pay it back in small steps with interest. So clear, so simple, so sure. You think in most cases. But the credit risk should never be underestimated. If for some unpredictable reason you cannot repay the money, you will quickly find yourself in a debt trap. Therefore, thorough consideration is called for beforehand.
Does the risk apply to every loan?
In principle, there is also a certain credit risk with every loan. This is usually broken down into 3 areas: unemployment, incapacity for work/illness and death. Even the most secure job can be at risk. It doesn’t even have to be the employee’s fault. It is sufficient if the well-being of the company is endangered due to external circumstances, restructuring takes place or insolvency occurs. Nobody is completely immune to diseases either. A serious illness usually means that you are no longer able to work. The earnings are lost, but the bank still wants to have their money for the loan. The worst risk is death. As bad as it sounds, this cannot be ruled out either. An accident, an illness, a natural disaster, the reasons can be varied. After death, the risk usually passes to the closest relatives, who are often overwhelmed by this additional burden.
Nobody is immune to the risk of a loan.
If one of the three risks arises, there are often difficulties in repaying the loan. Over time, this creates a vicious circle from which you can hardly get out alone. After all, the bank always wants its money. Before taking out a loan, you should therefore consider carefully whether these risks can be borne or whether appropriate hedging makes sense.