What is a delinquency rate?
Before we talk about delinquency rates, let us start by explaining what delinquency means. When can a lender report a loan as delinquent? Lenders will not usually report on the first payment missed, but he might on the second. Until the second missed payment, the lender will not report to the credit bureaus, also called credit reporting agencies. The lender can report delinquency after 60 days, and he can continuously do so every month if the borrower does not settle his debts. This can go on and on until 270 days.
So, what happens if the borrower still does not pay after 270 days or nine months? The federal regulations can say that this federal loan is already a default. Private sector lenders and borrowers follow different US state codes regarding loans. It will define the loan and whether it is a default or not. Once this happens, lenders will hire third-party collection agents to retrieve the delinquent loans that the borrowers did not pay.
Now, what is a delinquency rate?
Now we have explained how delinquent loans mean. We can adequately introduce delinquency rates. Delinquency rate refers to the loan percentage with delinquent payments inside a financial institution’s loan portfolio. It is an important metric when we analyze and invest in loans. If we follow this, it is easier to find comprehensive statistics regarding delinquencies on any loan.
How to calculate delinquency rates
Lenders, especially those involved in corporate debts, need to report loan delinquency rates to the borrower’s credit quality. This will help investors know about the risks that come with giving out loans. So, since we say this, let us have an insight into the calculation of delinquency rates. We divide the number of delinquent loans by the number of loans held by the institution. Let us say that Bank A holds 1,000 loans in its portfolio. In those 1,000 loans, 200 have delinquent payments beyond 60 days. What is the delinquency rate if we divide 200 by 1000? We have a 20% delinquency rate.
What happens to delinquent borrowers?
If you are a borrower, you might not want to miss any payment two times in a row. Why? Credit bureaus give borrowers delinquency rate marks on their trade lines along with their credit reports. Depending on how long you have missed payment, the credit bureau will mark your late payments if you have not paid for 60 to 270 days. Let us say that you missed payments, but you paid today. However, you defaulted once again. What happens next? You will have a new delinquency cycle that will show on your tradeline. Credit agencies and lenders will always check borrower’s delinquent marks. So, if you are planning to borrow more in the future, you better avoid delayed payments. Or, if you are planning to borrow and you have many delinquent marks, you can try to borrow again but do not get your hopes too high because the credit bureau or the lenders might hesitate to lend you money, and they would instead lend others they can trust more.