Default Rate: Definition, How It Works, and Key Criteria

What the default rate is

The default rate is the share (percentage) of outstanding loans a lender has written off as unpaid after a sustained period of missed payments. The term can also refer to a higher “default” or penalty interest rate charged to borrowers who fall behind.

How delinquency and default work

Delinquency begins when a borrower misses payments. After two consecutive missed payments (about 60 days past due), accounts are typically reported to credit bureaus as delinquent.
Lenders report ongoing delinquencies until the debt is written off. For many federally backed loans (for example, certain student loans), a loan is commonly declared in default after about 270 days of missed payments; timing for other loan types is often set by state law or the loan contract.
Once declared in default, loans are frequently removed from the lender’s active books and transferred to collections or charged off.
A default stays on a consumer credit report for six years, even if the debt is later paid, and significantly damages credit scores.

Why default rates matter

For lenders: default rates measure credit risk and help determine whether lending practices or underwriting standards need adjustment.
For economists and policymakers: default rates, together with indicators like unemployment, inflation, bankruptcy filings, and consumer confidence, help gauge overall economic health.

Benchmarks and indexes

Credit-data firms and rating agencies publish default indexes by loan type to track trends, including first and second mortgages, auto loans, and bankcards. Composite indexes that combine multiple loan types provide a broader view. Historically, unsecured products such as bank credit cards tend to show higher default rates than secured loans.

Regulatory and consumer-protection notes

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act restricts when and how card issuers can raise rates: issuers generally cannot raise a cardholder’s rate because the borrower is delinquent on unrelated debts; issuers can begin charging a higher default rate when an account itself is at least 60 days past due (subject to the card agreement).
State laws and loan contracts may set different timeframes and remedies for default on non-federal loans.

Key takeaways

Default rate = percentage of loans written off after prolonged missed payments; it can also mean a penalty interest rate.
Delinquency is typically reported after about 60 days past due; many federal loans reach default around 270 days of nonpayment.
Defaulted loans damage credit scores, remain on credit reports for six years, and are often transferred to collections.
Default rates are used by lenders to manage risk and by economists as an indicator of economic conditions.