Probability of Default
The probability of default (PD) is used to indicate the likelihood that borrowers will not be able to repay their liabilities (e.g. loans) in the future.
Hence, the probability of default affects the interest rate as well as the loan term and thereby also other conditions such as the instalment amount or monthly rate. It is therefore an essential component of the risk assessment and scoring.
Based on the probability of default, the default rate can also be calculated.