What is the term for the possibility that a borrower fails to repay a loan on time?

The term for the possibility that a borrower fails to repay a loan on time is known as credit risk. This concept is crucial in the lending industry because it directly affects the lender's ability to recover the funds lent to the borrower. Credit risk assesses the likelihood that the borrower will default on their loan obligations, which can lead to financial losses for the lender.

Credit risk is evaluated based on the borrower's credit history, financial situation, and overall ability to repay the loan. Lenders often use credit scores, income statements, and other financial information to determine how risky a borrower may be. Therefore, understanding credit risk is essential for both lenders and borrowers, as it influences loan terms, interest rates, and the overall lending process.

Other options may relate to financial concepts but do not specifically address the failure of a borrower to repay a loan. Interest risk typically pertains to the fluctuations in interest rates affecting the value of investments, while investment risk involves the chance of losing money on investments. Liquidity risk refers to the difficulty of converting an asset into cash without a significant loss in value. None of these terms accurately captures the situation of a borrower defaulting on a loan, making credit risk the appropriate choice.