What Is a Delinquency Rate?
Delinquency rate measures the percentage of loans in a financial institution’s loan portfolio that have delinquent payments. This metric is vital for evaluating the health of the loan portfolio and making informed investment decisions. Comprehensive statistics on delinquencies of various loan types are readily available.
How Delinquency Rates Work
Tracking Delinquency Rates
Lenders usually wait until a borrower misses two consecutive payments before reporting a loan as delinquent. This means the borrower is reported as 60 days late to credit bureaus. Continuous late payments get reported each month up to 270 days, after which a federal loan is considered in default according to federal regulations. Loans from private lenders adhere to state laws. To recover delinquent payments, lenders often engage third-party collection agents.
Reporting Delinquency Rates
Credit bureaus mark individual credit lines with various delinquency levels (60 days late, 90 days late, etc.). A borrower who continually misses payments accumulates these marks, impacting their creditworthiness. Lenders and agencies examine these delinquency marks when considering credit approvals.
For corporate debt, lenders report total delinquency rates based on the borrower’s credit quality, helping investors assess associated risks.
Calculating Delinquency Rates
To calculate the delinquency rate, divide the number of delinquent loans by the total number of loans in the portfolio. For example, if a bank has 1,000 loans and 100 are delinquent, the delinquency rate is 10% (100 ÷ 1,000 = 0.10 or 10%).
Special Considerations: Publicly Reported Delinquency Rates
The Federal Reserve System publishes quarterly data on delinquency rates across the U.S. financial market. As of the first quarter of 2022, the overall delinquency rate from loans and leases at commercial banks was 1.40%. Residential real estate loans reported a delinquency rate of 2.13%, while consumer credit cards had a rate of 1.73%.
Types of Loans with the Highest Delinquency Rates
Student Loans
Student loans have the highest delinquency rates, standing at 12% from May 2021 to May 2022. This rate has reduced from a peak of 17% in the fall of 2019 due to payment relief initiatives under the CARES Act during the COVID-19 pandemic.
Bank Loans
Regarding bank loans, residential real estate loans (2.13%) and consumer credit cards (1.73%) lead in delinquency rates. Other loans such as miscellaneous consumer loans, farmland real estate loans, and consumer agricultural loans also have notable delinquency rates. Commercial real estate loans have the lowest delinquency rate at 0.78%.
Impact of Delinquencies on Loan Approval
The presence of delinquencies on a credit report can hinder a borrower’s ability to secure a loan, especially if there are multiple instances of delinquency.
Related Terms: Loan, Credit Report, Loan Default, Federal Reserve System.
References
- Federal Reserve. “Delinquency Rates”.
- Federal Reserve. “Economic Well-Being of U.S. Households (SHED)”.
