Delinquency Rate Definition
Delinquency Rate refers to the percentage of loan in a mortgage portfolio whose payments are due and is often used by investors to study banking institution whose main business model is to earn interest from lending. If this rate is high, then the portfolio of mortgage loans is bad as many loans are not paying instalments on the due date.
Delinquency Rate helps to evaluate banks whose main business is to offer loans. 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 as delinquent. The time frame is usually 60 days. So if a borrower doesn’t pay installment for 60 days, that loan is termed delinquent. It tells the total loans which are delinquent in a portfolio.
The formula is represented as below –
- Number of Delinquent Loan = Total number of loans that have not paid installment for 60 days
- Total Number of Loans = the Total number of loans that are present in the loan portfolio.
The delinquency rate considers the count of loans, not the value of each loan
An institution that is primarily engaged in lending money has 100 loans outstanding. Out of the 100 loans, there are few loans whose payments are due –
- 12 Loans – Instalment due for 45 days
- 15 Loans – Instalment due for 62 days
- 10 Loans – Instalment due for more than 90 days
Find the delinquency rate for the loan portfolio.
Calculation of Delinquent Loan
Calculation of Delinquency Rate can be done as follows –
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. This is not a good figure for the loan portfolio. The institution will have to hire a third party now to recover payments, which is costly.
So loan portfolios should have a low delinquency rate. The higher the rate, the worse it is for the loan portfolio and the institution.
How does it Work?
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; it occurs when we ignore the signals. So it should be studied properly by the loan-giving institutions and governing bodies to pick-up signals and act fast.
Delinquency Rate vs. Default Rate
Delinquent loans are those whose payments are pending for more than 60 days. Once the payment is not paid for more than 270 days, that loan needs to be written off. So that loan turns out to be a default.
The default rate is the total loan defaulted upon the total loan in a portfolio. This rate shows the loss of the loan portfolio. Once it is the default, it means that 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 & its definition. Here we discuss the formula to calculate delinquency rate along with an example, interpretation, and how does it work. You can learn more about from the following articles –