A delinquency rate is an expression of the number of loans in a portfolio with payments that are more than three months late. A high delinquency rate suggests that borrowers are having difficulty repaying their loans. Lenders regularly calculate delinquency rates to determine the overall health of their lending portfolios. This information is included in legally mandated disclosures that are used by regulators and investors to gauge the performance of financial institutions.
This rate is calculated by dividing the number of loans in delinquency by the total number of loans in the lending portfolio. Some banks may calculate it in terms of value, rather than number. Sometimes the calculation includes both number of loans and value of loans to put the delinquency rate into perspective. In a simple example, if a bank has 1,000 car loans out and 10 borrowers are in delinquency, it has a delinquency rate of 1% on its car loans.
Banks can also calculate delinquency rate by demographic. This can provide important information that is used when generating loans to determine what kinds of loans and terms to offer. Delinquency rates broken down by credit score are a common tool for lenders. The higher the credit score, the lower the number of delinquencies in that category tends to be, making borrowers with similar scores less risky than borrowers with low scores. Other demographic information that can be used for statistical analysis include gender, race, and region.
Delinquency rates provide important information. They are influenced by a number of factors, including traits specific to individual borrowers such as lack of interest in repaying loans, as well as external factors like overall economic health. When the economy is poor and people lose jobs, the cost of living goes up, and other pressures develop, more loans tend to go into default because people cannot afford to pay them or are reordering their financial priorities.
Because the rate of delinquencies can be a measure of economic health, it is not uncommon for information about loans in default to be released to the public. The media may report on periodic rate announcements in the context of stories about business and the economy, and this information is also used by regulators and government agencies involved in setting fiscal policy. There is an incentive to keep delinquency rates as low as possible, because loan defaults tend to have a ripple effect in the financial industry that leads to decreased availability of credit, bank failures, and other problems.