Credit Default

A loan in default is a loan whose instalments could not be paid within the time frame agreed in the repayment schedule of the loan agreement. The borrower is usually granted a grace period of 90 or 180 days. Within this period, the borrower is not yet in default, but is in arrears. If a borrower is in considerable financial difficulties and it seems unlikely that the lender will be able to meet its payment obligations, this is also a reason for classifying the loan as in default.

The criteria are precisely defined, for example, in the EU Capital Requirements Regulation (CRR) or by rating agencies such as BRISMO, which can also verify LEND.

The probability of default (PD) indicates how high the probability is that borrowers will not be able to repay their outstanding debts in the future.

The probability of default therefore has an influence on the interest rate and hence also on other conditions such as the amount of the instalment. It is consequently an essential component of credit risk management and scoring.

As a loan is often repaid over time, the entire amount lent is not immediately irretrievably lost in the event of a loan default. To determine the default rate, the probability of default and the loan amount at the time of default (equity at time of default) are set in relation to the invested capital.

The default rate can be used as a key figure for the evaluation of receivables management (debt collection). Historical default rates can be used to verify the accuracy of the credit check and better assess the default risk for the future.

Debt collection measures can still lead to success even after a loan default. At LEND, we try to recover outstanding debts for as long as possible. The share of outstanding loan debts that can be recovered after a loan default is called the recovery rate.

A loan that has been either fully or partially repaid after being listed as a loss is recognisable in our ‘Cumulative Net Loss’ statistics as a declining curve.