What is Delinquent?

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Definition:

Delinquent is a debt status that takes place when a borrower fails to make their scheduled payments.

🤔 Understanding delinquency

When a borrower doesn’t follow through with a contractual agreement to repay debt, the loan may become delinquent. Depending on the circumstances and how long it's been since the borrower made payments, there are many potential repercussions for delinquency. First, a lender might charge a late fee. Next, the lender may report the late payment to credit bureaus, which can negatively impact the borrower’s credit score. Finally, a delinquent debt may eventually go into default. At this time, the lender might sell the debt to a collection agency or take legal action against the borrower.

Example

Suppose Brandon was having a hard time staying on top of his bills, and was no longer able to make his federal student loan payments. Instead of working with his lender to talk about other options, Brandon stopped making his payments. The federal government’s policy is to report delinquent student loan debt to the credit bureaus after 90 days. At that point, Brandon’s credit score took a hit. The delinquency will stay on his credit report for the next seven years. Depending on how long it takes Brandon to begin making his payments again, things might get even worse. The lender could eventually gain a court order to withhold money from his tax refunds or garnish his wages if he doesn’t pay the debt.

Takeaway

A delinquent debt is like being late for curfew…

If you’re out with your friends and not paying attention to the time, you might find yourself late for curfew. You’re dreading going home knowing you’ll get an earful from your parents when you get there. At the same time, the consequences will be worse the longer you wait. Just like getting home past curfew, being delinquent on your debt has consequences. The longer you wait before you start making your payments again, the worse the consequences are.

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Tell me more…

What is delinquent?

Delinquent refers to the status of a debt that the borrower hasn’t paid on time. A debt is technically delinquent the day after you miss a payment, but lenders don’t necessarily take action against you immediately. Many lenders don’t report delinquent debts to credit bureaus until between 30 and 90 days after your first missed payment. It’s in the best interest of a lender to get you to a point where you can pay your bills. Because of this, lenders may be willing to work with you in the case of delinquency. Payment plans and forbearance (meaning a temporary pause on your monthly payments) are just a couple of the options that might be available.

What are the causes of delinquency?

Anytime you fail to make a debt payment on time, you’ve gone into delinquency. Your loan is technically delinquent the first day after your missed payment. Unfortunately, delinquency often occurs during a time of financial instability in someone’s life. The consequences of a delinquent debt can make things even worse.

There’s also the off-chance that a delinquency report is the result of human error. If you notice a delinquent account on your credit report when you know you paid the bill on time, you can reach out to your lender and file a dispute with the credit bureaus.

Why is delinquency a problem?

Delinquency can have serious impacts on both your present and future financials. The consequences range from a late fee, lower credit scores, and higher interest rates to eventual default, which can have serious legal and financial consequences.

What does a delinquent loan mean for the borrower?

First, depending on the type of debt, your lender is likely to charge a late fee. The late fee may apply on the first day after your missed payment, as soon as the debt becomes delinquent. After a certain period, a lender will report a missed payment to the three credit bureaus. The result is a negative mark on your credit report, and probably a drop in your credit score.

Finally, a delinquent debt can eventually go into default, which has even worse consequences. Your lender may take you to court and try to garnish your wages. Not to mention, the poor credit score might prevent you from getting another loan in the future.

What can you do if your loan becomes delinquent?

If you have a delinquent loan, handle it as soon as possible. The longer you let it sit, the worse the consequences become. The best option is to pay your bill if you can afford to. Catching up on missed payments is the quickest way to get out of default.

If you can’t pay, contact your lender as soon as possible. In the case of a real estate loan or a student loan, your lender may allow a forbearance, which is a temporary pause on your monthly payments. Lenders may also be willing to work with borrowers to help them get back on track. As a word of caution, forbearance can cause unpaid interest to capitalize, meaning it gets tacked onto your principal and also earns interest.

As a last resort, bankruptcy may also be a viable option. Filing for bankruptcy can help you get rid of some of your debt and get on a payment plan for the rest. Be aware that bankruptcy generally involves a liquidation of your assets and many years with a low credit score.

How does credit card delinquency work?

An unpaid credit card bill becomes delinquent the date after your first missed payment. But depending on your credit card company, the consequences might not kick in immediately. When you first become delinquent on your bill, your credit card company will likely charge you a late fee. As long as you pay the bill within the first 30 days, that’s probably the worst of it.

Once your bill is 30 days past due, your credit card company will likely report your delinquent payments to the three credit bureaus. This mark stays on your report for the seven years, and will most likely knock your credit score down. Additionally, your lender may charge another late fee. Each month you don’t pay your payment, expect another mark on your credit report and another late fee. The lender may also at some point increase your credit card interest rate.

Once your credit card bill becomes 120 days or more past due, your creditor will probably sell your account to a collection agency. This is also reported to the three credit bureaus. Collection agencies generally buy debts for less than the full amount and then try to get payment from the borrower. Once the account goes to a debt collector, the company will probably reach out to you to begin the repayment process.

What is the difference between delinquent and default?

Delinquency describes any debt that’s overdue, even if it’s just by one day. Delinquent debts don’t always have a negative impact on the borrower’s credit report, since most lenders don’t report unpaid debts that early. A credit card company might not report a delinquent bill until it’s 30 days past due, while the federal government doesn’t report delinquent loans until 90 days later.

Default is like delinquency, but worse. It’s the point at which your lender might take legal action against you to get its money back. For federal student loans, your debt goes into default after 270 days of late payments. At this point, the government may assume that you aren’t planning to pay back the loan on your own. Your lender may take you to court to get its money, and the court may take steps such as garnishing your wages or tax returns until you’ve paid your debt back.

In the case of home loans, mortgagees (aka lenders) can begin legal action after 120 days. At this point, the lender might begin the foreclosure process. Default also applies to credit card debt. In the case of credit cards, companies are more likely to enlist the help of a collection agency to get their money back.

What are the historical delinquency rates?

From the beginning of 1991 through the fourth quarter of 2019, the United States saw an average mortgage delinquency rate of 4.1%. But this number tells very little of the story. For most of those years, delinquency rates were lower than that, even dropping below 2% between 2003 and 2007.

When the Great Recession hit in 2007, delinquency rates increased drastically for several years. The rates peaked in early 2010 at 11.54% and decreased fairly steadily after 2012, falling below 3% during the third quarter of 2018.

Unlike mortgage delinquency, student loan delinquency has consistently trended upward over the past decade and a half. After sitting just over 5% in 2003, delinquency rates now exceed 10%. The current rate is partially a result of a drastic increase that began in 2012 and 2013 and has yet to drop again. For nearly a decade now, student debt has made up the biggest percentage of delinquent household debt.

What are the delinquency rates as of 2020?

Delinquency rates vary significantly depending on the type of debt. The first half of 2020 saw an increase in the number of mortgage delinquencies, increasing to a rate of 4.36% for loans on one to four-unit properties.

The increase in home loan delinquencies in 2020 can be closely linked to the economic downturn and an increase in unemployment as a result of the COVID-19 outbreak. Mortgage delinquencies generally follow the labor market. As the unemployment rate increases, delinquencies also increase, as fewer people have regular income to pay their bills. The current data includes those homeowners currently on loan forbearance, which is when the lender allows the borrower to temporarily postpone mortgage payments.

As for student loan delinquency, the rate in 2020 sits around 10.8% of borrowers. Because lenders of student loans don’t report loans until they are 90 days delinquent, this data only includes debt that falls into that category. Most of the delinquent student loans are federal loans, while private loans have a delinquency rate of just 4%.

The data regarding late student loan payments doesn’t include those students whose federal loan payments have automatically been suspended due to the COVID-19 outbreak.

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