Default Rate Calculation

Calculate the percentage of loans or accounts that have failed to meet payment obligations.

function calculateDefaultRate() { // Get input values var totalExposure = document.getElementById('total_exposure').value; var totalDefaults = document.getElementById('total_defaults').value; var resultContainer = document.getElementById('result_container'); var resultDisplay = document.getElementById('default_rate_result'); var successDisplay = document.getElementById('success_rate_result'); var statusDisplay = document.getElementById('health_status'); // Convert to numbers var total = parseFloat(totalExposure); var defaults = parseFloat(totalDefaults); // Validation if (isNaN(total) || isNaN(defaults)) { alert("Please enter valid numbers for both fields."); resultContainer.style.display = 'none'; return; } if (total <= 0) { alert("Total number of loans must be greater than zero."); resultContainer.style.display = 'none'; return; } if (defaults total) { alert("Number of defaults cannot exceed the total number of loans."); resultContainer.style.display = 'none'; return; } // Calculation Logic var rate = (defaults / total) * 100; var successRate = 100 – rate; // Determine Status based on industry standard thresholds (general approximation) var statusText = ""; var statusColor = ""; if (rate <= 1.5) { statusText = "Excellent (Low Risk)"; statusColor = "#27ae60"; // Green } else if (rate <= 4.0) { statusText = "Standard (Moderate Risk)"; statusColor = "#f39c12"; // Orange } else { statusText = "Critical (High Risk)"; statusColor = "#c0392b"; // Red } // Display Results resultDisplay.innerHTML = rate.toFixed(2) + "%"; successDisplay.innerHTML = successRate.toFixed(2) + "%"; statusDisplay.innerHTML = statusText; statusDisplay.style.color = statusColor; resultContainer.style.display = 'block'; }

Understanding Default Rate Calculation

The Default Rate is a critical financial metric used by lenders, banks, and credit card companies to assess the quality of their loan portfolios. It represents the percentage of all outstanding loans that have been written off as unpaid after a prolonged period of missed payments.

Unlike the delinquency rate, which measures loans that are merely late, the default rate measures loans where the lender has virtually given up hope of collecting the debt, typically after 90 to 180 days of non-payment.

The Default Rate Formula

Calculating the default rate is straightforward. It involves dividing the number of defaulted obligations by the total number of obligations in the pool.

Formula:
Default Rate = (Number of Defaulted Loans / Total Number of Loans Issued) × 100

Why is this Metric Important?

• Risk Management: Lenders use this rate to determine if they need to tighten lending criteria. A rising default rate indicates that too many high-risk borrowers are being approved.
• Interest Rate Setting: To compensate for the loss of capital, lenders often increase interest rates for new borrowers if the general default rate is high.
• Economic Indicator: On a macroeconomic scale, high consumer default rates often signal an economic downturn or recession.

Example Calculation

Imagine a small credit union has issued a total of 2,500 auto loans this year. After an audit, they discover that 125 of these loans have gone into default status due to non-payment.

To calculate the default rate:

1. Identify Total Loans: 2,500
2. Identify Defaults: 125
3. Calculation: 125 ÷ 2,500 = 0.05
4. Convert to Percentage: 0.05 × 100 = 5.00%

In this scenario, the credit union has a 5% default rate, which they would compare against industry benchmarks to determine their financial health.

Difference Between Default and Delinquency

It is crucial to distinguish between these two terms:

• Delinquency: The borrower is late on a payment (e.g., 30 days past due). The loan can still be recovered.
• Default: The borrower has failed to pay for an extended period, and the lender considers the contract broken. This usually triggers asset seizure (like foreclosure) or debt sale to collections.