Delinquency rates

What Is Delinquency Rates?

Delinquency rates represent the percentage of outstanding loans or accounts where borrowers have failed to make scheduled payments by the due date. This metric is a crucial component within Consumer Finance, providing insight into the financial health of borrowers and the quality of credit portfolios held by financial institutions. A loan becomes delinquent when a payment is missed, and it remains so until the overdue amount, including any late fees, is paid, or the loan goes into default. Monitoring delinquency rates is essential for assessing credit risk and broader economic conditions, as rising delinquency rates can signal distress among consumers.

History and Origin

The concept of tracking missed payments is as old as lending itself, but the formalized calculation and widespread analysis of delinquency rates gained significant prominence with the growth of modern consumer and commercial lending markets. Historically, banks and lenders individually tracked late payments to manage their loan portfolios. However, the aggregation and public reporting of delinquency rates became increasingly important, especially after major economic downturns highlighted their role as critical economic indicators.

A pivotal period for the heightened scrutiny of delinquency rates was the 2008 financial crisis, often referred to as the Great Recession. Leading up to this crisis, a surge in mortgage delinquencies, particularly among subprime borrowers, signaled underlying vulnerabilities in the housing market and broader financial system. The collapse of the United States housing bubble and the subsequent rise in interest rates led to an unprecedented number of borrowers missing mortgage repayments, which ultimately led to mass foreclosures. Regulators and economists began to more rigorously track and report these rates to understand the health of the lending environment and to anticipate potential systemic risks. For instance, the Consumer Financial Protection Bureau (CFPB) launched its Mortgage Performance Trends tool in 2017 to provide public access to detailed mortgage delinquency data, with historical information going back to 2008.⁸

Key Takeaways

• Delinquency rates measure the proportion of loans or accounts that are past due on payments.
• They serve as a key indicator of borrower financial stress and the overall health of credit markets.
• Different types of loans, such as mortgages, credit cards, and auto loans, have their own specific delinquency rates.
• Rising delinquency rates can precede economic slowdowns or recessions, while falling rates often accompany economic expansion.
• Lenders use delinquency rates as part of their risk management strategies, influencing underwriting standards and lending policies.

Formula and Calculation

The delinquency rate is typically calculated as the percentage of outstanding loan balances or the number of accounts that are delinquent. The specific definition of "delinquent" (e.g., 30, 60, or 90+ days past due) can vary by data source or loan type.

The general formula for calculating the delinquency rate based on outstanding balances is:

$\text{Delinquency Rate} = \frac{\text{Total Value of Delinquent Loans}}{\text{Total Value of All Loans Outstanding}} \times 100\%$

Alternatively, based on the number of accounts:

$\text{Delinquency Rate} = \frac{\text{Number of Delinquent Accounts}}{\text{Total Number of Accounts Outstanding}} \times 100\%$

For example, if a bank has $100 million in outstanding loans and $5 million of those loans are past due, the delinquency rate would be 5%. When evaluating this, an analyst might consider the debt service capacity of borrowers, which is their ability to make regular payments on their debt.

Interpreting the Delinquency Rate

Interpreting the delinquency rate involves understanding its context, including the type of loan, the current economic climate, and historical trends. A rising delinquency rate can signal increased financial hardship among consumers, possibly due to job losses, rising interest rates, or a general economic downturn. Conversely, a falling delinquency rate suggests improved borrower financial health and a stronger economy.

For example, the Federal Reserve provides data on delinquency rates across various loan types, including those for all commercial banks. This data can show trends over time, with shaded areas often indicating U.S. recessions, providing a clear visual correlation between economic cycles and loan performance.⁷ When assessing individual credit scores, a higher delinquency rate for a specific credit product like consumer credit might indicate a need for more stringent lending practices or an upcoming shift in consumer spending habits.

Hypothetical Example

Consider "Smooth Sailing Credit Union," which specializes in auto loans. At the end of Q1, Smooth Sailing has 10,000 active auto loan accounts with a total outstanding balance of $200 million. During its quarterly review, the credit union identifies 300 accounts, totaling $6 million in outstanding balances, that are more than 30 days past due on their payments.

To calculate the delinquency rate by number of accounts:
$\text{Delinquency Rate (Accounts)} = \frac{300 \text{ delinquent accounts}}{10,000 \text{ total accounts}} \times 100\% = 3.0\%$

To calculate the delinquency rate by outstanding balance:
$\text{Delinquency Rate (Balance)} = \frac{\$6,000,000 \text{ delinquent balance}}{\$200,000,000 \text{ total outstanding balance}} \times 100\% = 3.0\%$

This 3.0% delinquency rate would then be compared to previous quarters, industry averages, and the credit union's own internal risk thresholds. If the rate is trending upwards, Smooth Sailing might review its underwriting standards or increase its loan loss reserves.

Practical Applications

Delinquency rates are widely used across various sectors of finance and economics.

• Lending and Banking: Banks and other lenders closely monitor delinquency rates on their loan portfolios (e.g., mortgages, auto loans, credit cards) to assess asset quality and manage risk. High or rising rates can prompt adjustments to lending criteria, pricing, and collection efforts. The Federal Reserve often releases reports on household debt and credit, which include aggregate delinquency rates for various types of household debt, serving as a crucial gauge of consumer financial health.⁶
• Economic Analysis: Economists and policymakers use aggregate delinquency rates as a leading economic indicator. A broad increase in delinquencies across multiple loan categories can signal an impending economic slowdown or recession, as it suggests widespread financial stress among consumers. For example, data from the Federal Reserve Bank of St. Louis regularly tracks charge-off and delinquency rates on loans and leases at commercial banks, offering insights into the broader financial system.⁵
• Investment Decisions: Investors, particularly those in fixed income markets, analyze delinquency rates to assess the risk of asset-backed securities (e.g., mortgage-backed securities, auto loan asset-backed securities). Higher delinquency rates imply a greater risk of principal loss for investors.
• Regulatory Oversight: Financial regulators, such as the Federal Reserve and the Consumer Financial Protection Bureau, monitor delinquency rates to ensure the stability of the financial system and to identify potential areas of concern that might require regulatory intervention. For instance, the CFPB publishes comprehensive data on mortgage performance to help the public and regulators understand market health.⁴

Limitations and Criticisms

While delinquency rates are valuable, they have certain limitations. A single delinquency rate number may not provide the full picture without additional context.

• Lagging Indicator: Delinquency rates often reflect problems that have already occurred, making them a lagging indicator. While they can signal ongoing or worsening distress, they may not predict future issues with perfect accuracy.
• Aggregation Bias: Aggregate delinquency rates can mask significant variations within different loan types, geographic regions, or borrower demographics. For example, while the national credit card delinquency rate might appear stable, certain income groups or age cohorts could be experiencing significantly higher rates.³
• Severity Not Indicated: The rate itself doesn't always distinguish between short-term, minor delinquencies (e.g., 30 days past due) and more severe, long-term delinquencies (e.g., 90+ days past due), although data sources often provide breakdowns by different stages of delinquency.
• Policy Influences: External factors, such as temporary forbearance programs or changes in reporting standards (e.g., student loan payment pauses during the COVID-19 pandemic), can temporarily depress reported delinquency rates, making direct comparisons across different periods challenging.²

Understanding these nuances is crucial for a comprehensive risk assessment and for drawing accurate conclusions about consumer financial health and the broader economy.

Delinquency Rates vs. Default Rate

Delinquency and default are related but distinct concepts in finance, often causing confusion. A loan is considered delinquent when a borrower misses one or more scheduled payments by the due date. This state describes a payment that is late, but the loan has not yet reached a point where the lender considers it unrecoverable or has begun serious collection or seizure procedures. Loans can be 30, 60, 90, or more days delinquent.

In contrast, a default rate signifies a more severe failure to meet the terms of a loan agreement. A loan goes into default after a prolonged period of delinquency (the specific duration varies by loan type and lender policy, often 90 to 180 days past due) or when the borrower has formally declared bankruptcy. At this point, the lender may accelerate the loan, demand immediate repayment of the full balance, or initiate collection actions such as foreclosure for mortgages or repossession for auto loans. Therefore, delinquency is the precursor to default, representing a temporary state of missed payments, while default is the ultimate failure to repay.

FAQs

What causes delinquency rates to rise?

Delinquency rates can rise due to several factors, including widespread job losses, increases in interest rates, a slowdown in economic growth, excessive household borrowing, or unexpected financial shocks like medical emergencies or natural disasters.

Are higher delinquency rates always bad for the economy?

Generally, yes. Higher delinquency rates often indicate financial stress among consumers and businesses, which can lead to reduced spending, decreased lending activity, and a slowdown in overall economic growth. They can also signal an increased risk of default and potential losses for lenders.

How do delinquency rates affect my credit score?

Missing payments, which leads to delinquency, negatively impacts your credit score. The longer a payment is overdue and the more frequently payments are missed, the more significant the damage to your creditworthiness. Lenders and credit bureaus record these delinquencies, which can make it harder to obtain new credit or secure favorable interest rates in the future.

What is a "serious" delinquency?

A "serious" delinquency typically refers to payments that are 90 days or more past due. This stage often precedes a loan going into default and is considered a significant red flag for both the borrower and the lender. Different categories of delinquency (e.g., 30-59 days, 60-89 days, 90+ days) help to gauge the severity of payment issues.¹