What Is a Delinquency Rate?
Delinquency rate refers to the percentage of loans within a financial institution's loan portfolio whose payments are delinquent. When analyzing and investing in loans, the delinquency rate is an important metric to follow; it is easy to find comprehensive statistics on the delinquencies of all types of loans.
How Delinquency Rates Work
Tracking Delinquency Rates
Typically, a lender will not report a loan as being delinquent 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 their payment. If late payments persist, then each month that the borrower is late, the lender may continue reporting the delinquency to the credit agencies for as long as 270 days.
After 270 days of late payments, the code of federal regulations considers any type of federal loan to be in default. Loans between borrowers and private-sector lenders follow individual U.S. state codes that define when a loan is in default. To begin the process of retrieving delinquent payments, lenders generally work with third-party collection agents.
Reporting Delinquency Rates
The credit bureaus may give borrowers various delinquency rate marks on the individual tradelines included with their credit reports. If a borrower is consistently delinquent, they will receive marks for 60 days late, 90 days late, and so on. If a borrower makes a payment and defaults again, then a new cycle of delinquency appears on the tradeline. When considering a borrower for credit approval, credit agencies and lenders consider all of a borrower's delinquent marks.
Often, especially with corporate debt, lenders will report total delinquency rates on loans according to the borrower's credit quality; this can help investors gain insights into the risks involved with specific loans.
Calculating Delinquency Rates
To calculate a delinquency rate, divide the number of loans that are delinquent by the total number of loans that an institution holds. For example, if there are 1,000 loans in a bank's loan portfolio, and 100 of those loans have delinquent payments of 60 days or more, then the delinquency rate would be 10% (100 divided by 1,000 equals 10%).
Special Considerations: Publicly Reported Delinquency Rates
The Federal Reserve System (FRS) provides public data on delinquency rates quarterly across the U.S. financial market. As of the fourth quarter of 2018, the total delinquency rate from loans and leases at commercial banks was 1.79%. Residential real estate loans reported the highest delinquency rate at 2.83%. Consumer credit cards reported the second-highest delinquency rate at 2.54%.