Loans are one of the purest examples of risk management. The basic principle behind risk management in economics is: (Probability of achieving benefit x value of benefit) – (probability of achieving loss x cost of loss) Or in a more concise form: (P(B)xB)-(P(L)xL)
Where a risk is deemed worth it if the equation is equals something greater than 0. At zero it is considered a push, and most likely there are better uses for your money and time, whereas below zero the risk is greater than the reward. Loans fall into risk management when someone analyzes the potential cost not being to pay it off quickly. If ever driven by a loan service in Elmwood Park, IL, or any other town in the country, and wondered why people would take small loans with potentially huge interest, that
