What term refers to the risk of a borrower defaulting on a loan?

The term that refers to the risk of a borrower defaulting on a loan is credit risk. This type of risk arises when a borrower is unable to meet their contractual obligations, such as repaying the loan as agreed. Credit risk is a significant consideration for lenders because it directly impacts their potential for financial loss.

Understanding credit risk is crucial for financial institutions, as it influences their lending decisions, interest rates, and the overall stability of the financial system. By assessing the creditworthiness of borrowers through credit scores and other financial metrics, lenders can gauge the likelihood of default and make informed decisions about extending credit.

Other types of risks listed, such as liquidity risk, market risk, and operational risk, pertain to different aspects of financial uncertainty but do not specifically relate to the borrower's ability to repay a loan. Liquidity risk involves the risk of not being able to meet short-term financial obligations, market risk refers to the risk of losses due to changes in market prices, and operational risk encompasses failures in internal processes or systems. Therefore, the focus of credit risk is specifically on the borrower's potential to default on a loan, making it the correct answer.