Default Rate

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What is the default rate?

The default rate is the percentage of all outstanding loans that a lender has written off after a long period of missed payments. A loan is usually declared in default if the payment is 270 days late. Overdue loans are generally written off from the issuer’s financial statements and transferred to a collection agency.

The term default rate can also refer to the higher interest rate charged to a borrower who has missed regular loan payments.

[Important: A default record stays on the consumer’s credit report for six years, even if the amount is eventually paid.]

Understand the default rate

Default rates are an important statistical measure used by lenders to determine their risk exposure and by economists to assess the overall health of the economy.

Standard & Poor’s (S&P) and the credit reporting agency Experian jointly produce a number of indices that help lenders and economists track default levels on various types of loans over time. The S & P / Experian indexes are:

  • The default S & P / Experian consumer credit index
  • The S & P / Experian First Mortgage Failure Index
  • The S & P / Experian Secondary Mortgage Default Index
  • The S & P / Experian Auto Default Index
  • The default index for S & P / Experian bank cards

The default S & P / Experian consumer credit index is the most comprehensive in the series. It includes data on first and second mortgages, auto loans and bank credit cards. In March 2019, the S & P / Experian Consumer Credit Default Composite Index recorded a default rate of 0.92%. Its highest rate in the past five years was in mid-February 2020, when it reached 1.12%.

Of all the components in the series, bank credit cards generally have the highest default rate. The default rate on credit cards was 3.68 in March 2019. It had fluctuated between 3.04% and 3.86% in the past five years.

The default process

Lenders do not worry too much about missed payments before the end of the second missed payment period. When a borrower misses two consecutive loan payments and is therefore 60 days late in their payments, the account is considered overdue and the lender reports it to the credit reporting agencies.

The overdue payment is then recorded as a black mark on the borrower’s credit rating. The lender can also increase the borrower’s interest rate as a penalty for late payment.

If the borrower continues to default on payments, the lender will continue to report defaults until the loan is written off and declared in default. For federally funded loans such as student loans, the default time is 270 days. The schedule for all other types of loans is established by state laws.

In all cases, defaulting on a debt damages the borrower’s credit rating, making it difficult or impossible to obtain credit approval in the future. The default record remains on the consumer’s credit report for six years, even if the amount is ultimately paid.

Recent changes to the default rate law

The Credit Card Liability, Liability and Disclosure (CARD) Act 2009 created new rules for the credit card market. Notably, the law prevents lenders from increasing a cardholder’s interest rate because a borrower is past due on any other unpaid debt. In fact, a lender cannot start charging a higher default interest rate when an account is 60 days past due.

Key points to remember

  • The default rate is the percentage of all outstanding loans that a lender has written off after a long period of missed payments.
  • A loan is usually declared in default if the payment is 270 days late.
  • Default rates are an important statistical measure used by economists to assess the overall health of the economy.

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