What is a delinquency rate?
The default rate refers to the percentage of loans in the loan portfolio of a financial institution whose payments are past due. When analyzing and investing in loans, the delinquency rate is an important measure to follow; it is easy to find complete statistics on unpaid loans from all types of loans.
How delinquency rates work
Delinquency rate monitoring
Typically, a lender will not report that a loan is past due until the borrower has missed two consecutive payments, after which a lender will report to the credit reporting agencies, or “credit bureaus,” that the borrower is 60 days late in his Payment. If late payments persist, then every month that the borrower is late, the lender can continue to report default to credit agencies for as long as 270 days.
After 270 days of late payment, the code of federal regulations considers that any type of federal loan is in default. Loans between borrowers and private sector lenders follow the codes of individual US states that define when a loan is in default. To begin the process of recovering overdue payments, lenders generally work with third-party collection agents.
Delinquency rate reporting
Credit bureaus can give borrowers various delinquency rate notes on different lines of credit included in their credit reports. If a borrower is constantly past due, they will receive notes for 60 days late, 90 days late, etc. If a borrower makes a payment and defaults again, a new delinquency cycle appears on the transaction line. When considering a borrower for credit approval, credit agencies and lenders take into account all of a borrower’s late marks.
Often, especially with regard to corporate debt, lenders report total loan default rates based on the credit quality of the borrower; this can help investors better understand the risks associated with specific loans.
Calculation of delinquency rates
To calculate a default rate, divide the number of delinquent loans by the total number of loans held by an institution. For example, if there are 1,000 loans in a bank’s loan portfolio and 100 of these loans have overdue payments of 60 days or more, the default rate would be 10% (100 split by 1,000 equals ten%).
Special considerations: publicly reported delinquency rates
The Federal Reserve System (FRS) provides quarterly public data on crime rates in the US financial market. In the fourth quarter of 2020, the total default rate for loans and rentals in commercial banks was 1.79%. Residential mortgage loans recorded the highest delinquency rate, at 2.83%. Consumer credit cards had the second highest delinquency rate, at 2.54%.