Toxicity

Toxicity, when referring to loans, means that the debt has a low chance of being repaid with interest. Toxic debt is toxic for the individual or institution that lent the money and is expecting to be repaid and collect the interest.

Typically, toxic debt exhibits high default rates, changing interest rates, and a higher debt accumulation than can be repaid. The individual or institution that loaned the money has a low chance of collecting the payments and interest, signifying toxicity.

Toxic assets occur when the toxic debt has been securitized and the risk of the debt is passed on to the asset being created with the debt payments. An example of a toxic asset are the asset-backed securities that contributed to the 2008 financial crisis. These toxic assets consisted of toxic debts, and overtime they became difficult to dispose of and were highly illiquid.