Delinquency Rate

Delinquency Rate refers to the percentage of loans in a lending portfolio whose payments are due. If this rate is high, then the portfolio of loans is bad as a high percentage of borrowers are not paying installments on the due date. Investors often use it to study banking institutions whose main business model is to earn interest from lending.

If an individual has missed an installment for a financial obligation, say a mortgage, they contribute to the mortgage delinquency rate for the particular portfolio. Similar cases are possible for obligations such as credit cards, bond payments, or other loans. A loan 30 days past its due date is generally referred to as a delinquent account.

• The delinquency rate is the percentage of loans in a mortgage portfolio with unpaid payments.
• A lower delinquency rate is generally better, indicating that most loans are being paid on time.
• The delinquency rate is calculated based on the number of delinquent loans, not their total value. Administrative bodies may study the delinquency rate to forecast potential problems in the sector.
• Delinquent loans are those where payments have been unpaid for more than 60 days. If payments are still not made after 270 days, the loan is typically considered to be in default and must be written off.

The delinquency rate is the assessment of the percentage of loans within a portfolio that have surpassed 30 days since the due date of a financial obligation. These defaults can result in varying consequences depending on the type of loan or the agreement between the two parties.

Usually, if a credit card bill defaults on the due date, the borrower is charged a late fee, contributing to the portfolio’s credit card delinquency rate. In the case of a mortgage or a loan from a bank, the banks can order a foreclosure if the borrower does not pay up within a specific time frame which is pre-determined during the drafting of the loan agreement.

The delinquency rate helps to evaluate banks whose main business is to offer loans. It tells the total loans which are delinquent in a portfolio. Once a borrower is marked as a delinquent by the governing bodies, then the borrower's credit rating falls. There is usually a stipulated time frame after which a loan is termed delinquent. The time frame is usually 60 days. So if a borrower doesn't pay installment for 60 days, that loan is termed delinquent.

The formula to calculate the rate of arrears within a portfolio is discussed below. The default rate across financial obligations put together comprises the US delinquency rate.

Delinquency Rate = (Number of Delinquent Loans / Total Number of Loans) * 100

• Number of Delinquent Loans = Total number of loans that have not paid installment for 60 days
• Total Number of Loans = the Total number of loans present in the loan portfolio.

The delinquency rate considers the count of loans, not the value of each loan.

Let us understand the US delinquency rate with the help of a couple of examples. These examples would help us understand the intricacies of the concept and the impact it has on the economy as a whole.

Example #1

An institution that is primarily engaged in lending money has 100 outstanding loans. Out of the 100 loans, there are few loans whose payments are due –

Given,

• 12 Loans – Installment due for 45 days
• 15 Loans – Installment due for 62 days
• 10 Loans – Installment due for more than 90 days

Find the delinquency rate for the loan portfolio.

Solution

Calculation of Delinquent Loan

• =15+10
• =25

Calculation of Delinquency Rate can be done as follows -

• =25/100*100
• =25

Example #2

In May 2023, the Federal Reserve raised key interest rates for the 10^th time in 14 months. These interest hikes have been made in the light of significant price instability. The Federal Reserve also said these the interest rate hike in May 2023 might be the last for at least two quarters.

This hike took the interest rates in the United States to their highest point in 16 years. Moreover, multiple conglomerates have been laying off employees due to financial crunch and other issues. As a result, multiple banks reported their highest US delinquency rate. For instance, the CEO of Capital One, Richard Fairbank said that the arrears in their loan portfolio have risen 134 basis points to 3.66%, which is the highest since March 2019.

The impact of a credit card or mortgage delinquency rate for a lending corporation is huge. In the larger scheme of things, it also impacts the economy in a that was best seen during the 2008 financial crisis.

If, for an institution, the delinquency rate for a loan portfolio is 25%, then out of 100 loans issued in the market, 25 loans are not making timely payments. It is not a good figure for the loan portfolio. The institution will have to hire a third party to recover payments, which is costly.

Therefore, loan portfolios should have a low delinquency rate. The higher the rate, the worse it is for the loan portfolio and the institution.

The delinquency rate is studied by governing bodies to predict the crisis of a particular sector. If it is seen that the delinquency rate of a particular sector has increased suddenly, then the government should act quickly before any crisis occurs. No economic crisis occurs without any signal; we ignore the signals. So, the loan-giving institutions and governing bodies should be studied properly to pick up signals and act fast.

Both these concepts have been closely linked and discussed. However, there are differences in their fundamentals and implications. Let us understand the differences through the comparison below.

Delinquent loans are those whose payments are pending for more than 60 days. That loan needs to be written off once the payment is not paid for more than 270 days. So that loan turns out to be a default. The default rate is the total loan defaulted upon the total loan. This rate shows the loss of the loan portfolio. Once it is the default, the chances of recovery are NIL, unlike delinquent loans, where the chances of recovery are still there.

This has been a guide to Delinquency Rate and its meaning. Here we explain its formula, examples, and impact, and compared it with default rates. You can learn more about from the following articles –

• Collateralized Mortgage Obligations
• Loan Servicing
• Delinquent Account
• Subprime Loans