Introduction
What does delinquent mean?
In financial terms, an individual, firm or any other institution is said to be delinquent when they are unable to pay their debts within the agreed time. This financial obligation can be of various kinds like a delay in payment of EMI (Equated Monthly Installments) on loans, credit card payments, bond payments, or any other form of payment in which the borrower hasn’t made payments to satisfy the debt(s). This state of being in arrears often leads to defaults if the arrears aren’t up to date and the payments are continuously delayed.
Understanding being delinquent
Now that you have understood the basic meaning of the term, it is time to dive deeper and see how a firm, individual or institution becomes delinquent.
In financial terms, this term refers to a situation wherein the borrower is overdue on a payment related to taxes, bonds, mortgage, load, etc. But not all delays in payment end up with the borrower being categorised as delinquent, as only a delay of more than 30 days is considered to be a delinquent account.
While mostly the reason behind this delay is due to failure in paying on time, sometimes it might also happen due to failure in performing duties by financial professionals who fail to live up to their responsibilities. An example of this could be an investment advisor putting an income-oriented client into a highly speculative stock thereby being delinquent in his duties. The consequences of the same are decided by the creditor and may vary from account to account, as each contract is unique. While failure to pay past dues won’t have much impact on your credit history, too many consecutive and frequent delinquencies can lead a debtor into default. This can be influenced by the duration, amount, reason and the type of loan. For instance, a late fee is imposed for the delay in credit card or EMIs but mortgage lenders, on the other hand, can initiate foreclosure proceedings in case the home owners don’t clear their past dues within a specific period of time. Delinquencies have a significant impact on your credit history also (it makes up 35% of the total score!) and can bring it down if the pattern is repeated several times. Some special cases like an insurance company failing to remind a universal policy holder about a possible lapse due to insufficient premium payments can also be considered delinquent.
What happens after delinquency?
If the payment is continuously delayed and it becomes a repeated pattern then it is considered as default. Once this happens, the lender can take action or issue an ultimatum depending on the nature of the loan of debt. For instance, the United States government considers student debt to be delinquent for 270 days before categorising it as default while lenders initiate foreclosure for single family mortgages which are overdue for more than 90 days (seriously delinquent). While it is often possible to negotiate and work with the lenders and bring your account up to date, it might still impact your credit score adversely. If you fail to clear the debt, then the lender may take further action like sending third parties for collections or filing a case in the court to collect the remaining balance. Lenders usually do not report to the federal government or the credit bureaus if the payment delay is less than 30 days while others might withhold reporting up to a delay of 60 days. But once reported, this information is compiled into official reports for proper investigation and tracking. What is the delinquency rate?
The delinquency rate represents the percentage of loans that are past the due date (or delinquent) in a loan portfolio. It is quite instrumental in analysing the economic and financial conditions of banks (portfolios) and the country so the government can set future policies and goals accordingly.
How to find the delinquency rate?
There are two ways in which you can calculate the delinquency rate:
Number of loans You can find the delinquency rate by dividing the current delinquent loans (loans that are past their due date) by the total number of loans given during that specific time interval. You can multiply it by 100 to find the percentage.
**Delinquency rate = (Number of delinquent loans / Total number of loans) * 100**
For example, out of 1,000 loans sanctioned, 100 are delinquent then the delinquency rate will be: Delinquency rate = (100/1000)*100 = 10% Hence, the delinquency rate is 10%. 2. Value of loans You can also find the delinquency rate using the monetary value of these loans using the following formula:
Delinquency rate = Monetary value of delinquent loans / Total dollar amount of outstanding loans
This formula takes the amount of the delinquent loans to determine the delinquency rate and is given more preference by government institutions like the U.S. Federal Reserve to find the delinquency rate at any given time.
For example,
$1,000,000 in delinquent loans / $100,000,000 in outstanding loans = .01 x 100 = 1% Hence the delinquency rate, in this case, will be 1%.
Why is the delinquency rate important?
The delinquency rate is considered an important economic indicator as it shows the increase (or decrease) in the number of unpaid loans over time. It helps in generating accurate reports that help track the delinquency rates for different loans, mortgages, credit cards, etc and determine the economic health of the country, sector or region. It also helps in determining the quality of a bank’s loan portfolio and various other lending institutions (a lower delinquency rate is more desirable and poses less risk, hence a higher return pool).
How to remove delinquency?
Even though delinquencies are reported to credit reporting agencies, you can still make sure they don’t adversely affect your credit history (to some extent) by negotiating with the lender and writing to the credit bureau.
How to prevent delinquency?
There are multiple ways to avoid delinquency and keep your credit score high for an easy loan-approval process in the future. You can schedule monthly payments to avoid delays, keep a check on the expenses and sign up for e-billing rather than receiving paper copies from lenders. You can even request your lender to keep the due dates close to the due dates to ensure timely payments without any troubles.
