A finance company’s delinquency ratio is the number of loans which are already past due taken against the number of loans which have actually been services. If, for example, a bank approved a hundred loans, seven of which are delinquent, then the delinquency rate is 7%. Such information is used to describe the financial institution’s loan portfolio quality.
A loan portfolio is comprised of all of the loans owed to a bank or finance company. In the company’s balance sheets, this item is recorded under assets. The loan portfolio’s value is dependent on the total amount owed, which includes both the principal amount and interest.
The creditworthiness of the loans is also factored into this equation. Creditworthiness simply refers to the borrower’s ability to meet current debt obligations, and do so on time. A borrower’s creditworthiness is evaluated by the lending institution, and is comprised of various factors. The bank or lending agency may take a look at the borrower’s credit history, because this is a good indicator of the borrower’s payment habits and reliability. It also considers the resources which are available to the borrower, specifically funds or property which ensure his ability to make payments.
By making sure that loans are approved for borrowers who are creditworthy, a finance company is able to raise the quality of its loan portfolio.
However, this is not to say that a finance company’s delinquency rate is solely dependent on the credit quality of its debtors. Other factors may also come into play, such as unemployment and other changes in the economy, particularly those on a macroeconomic scale.
A bank’s delinquency rate is indicative of the ability of borrower’s to repay loans. It may be important to note, however, that such delinquency is only usually recorded once payments are already three months late.