Credit & Risk: key terms, formulas and examples
Credit lets you use money now and repay later with interest. Collateral secures a loan, a credit score signals reliability, and diversification limits risk.
Example
A bank lends against equipment at a lower rate than an unsecured loan.
Takeaway
Borrow only for things that earn more than the interest costs.
Key terms
- Collateral
- An asset pledged to secure a loan.
- Diversification
- Spreading money or products across several areas to reduce risk.
- Interest rate
- The price of borrowing money, shown as a percentage.
- Budget
- A plan for how much money you expect to earn and spend.
- Credit score
- A number showing how likely someone is to repay debts.
Formulas
Simple interestP × r × t
Credit utilizationB ÷ L × 100
Debt-to-income (DTI)D ÷ I × 100
Net worthA − L
Savings rateS ÷ I × 100
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