The delinquency rate is the percentage of loans that are delinquent, or past due, in a loan portfolio. The delinquency rate is used primarily by analysts—both economic and financial—to examine the health of a bank’s loan portfolio and the health of the economy.
Here’s what it is, how to calculate it, and some examples of delinquency rates.
Definition and Examples of a Delinquency Rate
The delinquency rate is the percentage of loans that are delinquent, or past due, out of the total number of loans. The lower the percentage of delinquencies, the more desirable the loan portfolio is to economists and analysts.
There are two methods for calculating the delinquency rate. One formula is this:
Delinquency rate = Number of delinquent loans / Total number of loans
Multiply this number by 100 to get the delinquency rate as a percentage.
Here’s a quick example: In a pool of 1,000 loans, 10 of them are delinquent. Using the formula above, you would calculate the delinquency rate as follows:
10 delinquent loans / 1,000 total loans = .01 x 100 = 1%.
In this example, 1% of the total loans are delinquent. That percentage represents the delinquency rate.
The second formula takes into account the amounts of delinquent loans. It is expressed like this:
Delinquency rate = Dollar amount of delinquent loans / Total dollar amount of outstanding loans
Using a dollar amount instead of the number of loans, the equation would be:
$1,000,000 in delinquent loans / $100,000,000 in outstanding loans = .01 x 100 = 1%
The second method is preferred by the U.S. Federal Reserve because it takes into account the delinquent loans’ values.
How Does a Delinquency Rate Work?
Lenders generally do not report delinquency to credit bureaus and the federal government until a payment is at least 30 days late, and some lenders wait until it’s 60 days past due.
This information is compiled into reports by the Federal Reserve from the quarterly FFIEC (Federal Financial Institutions Examination Council) Consolidated Reports of Condition and Income.
It’s helpful to know what some of the most common delinquency rates currently are, as delinquency rates differ based on the type of loan. Here’s a sample from the Federal Reserve of the delinquency rates for loan products reported from the second quarter of 2021.
|Loan type||Delinquency rate from Q2 2021|
|Credit card debt||1.58%|
Industry averages for delinquency rates vary for different loan products. Student loans, for example, have a very high delinquency rate, with nearly two in 10 loans being more than 60 days late. Consumer loans, such as auto loans, have a low delinquency rate, at just 1.56%.
The delinquency rate is an important economic indicator. It shows an increase or decrease over time in the number of consumers unable to pay down loans they’ve taken out. Reports on delinquency rates for mortgages, student loans, auto loans, and credit cards can be a measurement of a market or region’s economic health.
It is also an important indicator of the quality of a loan portfolio for banks and other lending institutions. A loan portfolio with a lower delinquency rate is more desirable and indicates a lower-risk, higher-return loan pool.
The all-time high for mortgage delinquency rates (since this data started being gathered in 1991) occurred during the fallout of the subprime mortgage crisis in the first quarter of 2010. During that quarter, the delinquency rate for housing measured 11.54%. The delinquency rate remained above 10% until the first quarter of 2013.
Pressured by so many delinquent loans at that time, lenders introduced stricter lending standards, which further slowed the recovery of the housing market by limiting the pool of buyers. Foreclosures increased and some delinquent buyers attempted to sell homes in a short sale, where lenders accept a price on the sale of a home that is less than the amount owed on the mortgage.
The recovery of the housing market can be seen in the delinquency rates over time. From 2013 to the present, the delinquency rate has steadily declined.
Current mortgage delinquency rates range between 2% and 3%, which has been typical in the U.S. since mid-2018.
How the Delinquency Rate Affects Individual Borrowers
High delinquency rates affect all borrowers, as lenders limit their exposure to risk during these times. Lending is restricted for a number of kinds of borrowers, including those who might typically qualify for a loan. Low-down-payment loans, as well as loans to borrowers with lower credit scores, high debt-to-income (DTI) ratios, self-employed individuals, and other borrowers with unique circumstances were hard to find in the aftermath of the housing crisis.
Conversely, when the delinquency rate is low, it is much easier for borrowers to access money.
- Delinquency rates are important economic indicators.
- Lower delinquency rates are more desirable.
- Delinquency rates vary across different types of loans.
- High delinquency rates can affect all borrowers because money supply becomes tighter.