Financial institutions such as banks, credit unions, savings and loan companies and so forth make loans for a profit. The profit or rate of return for their investments depends on a lot of proven factors. The lender must determine the rate of risk involved in the lending each consumer money. Every borrower have a risk rate regardless of rather, the borrower is the government, business, or individual. Also, the lender must be cognitive of why the borrower is making the loan, this is regardless of the risks involved in making the loan. No lender want blindly to make a lending decision to an individual, group, or business that are using the funds in an unethical manner or for unlawful purposes.

The term risk in the financial market place simply means, the chance that a financial asset (loan) will not earn the return promised. Rate of risk explained to the ordinary consumer, can be done with this example. Three friends Joe, John and Jill. Joe borrowed fifty dollars from John March 1st, with the promise to repay him sixty dollars April 1st. Joe did not repay the loan at all. Joe later requested a twenty dollar loan from Jill. Jill asked John how did Joe repay the loan. John stated Joe defaulted on the loan. Therefore, Jill told Joe the only way she would make him the loan is at twice the interest rate that he was charged by John because he is a high risk borrower.