Delinquency

Delinquency is a fancy word for being late on your payments. It’s that moment of dread when you realize your mortgage, car loan, or credit card bill was due yesterday. Officially, delinquency occurs when a borrower fails to make a scheduled payment on a debt by its due date. While a single day late might technically make a loan delinquent, the term is more commonly used to describe payments that are 30, 60, or 90 days past due. Think of it as the first warning sign on the road to a more serious financial problem: default. It’s not the end of the world, but it’s the point where lenders start paying closer attention, late fees begin to pile up, and your financial reputation—your credit score—is put at risk. For investors, understanding delinquency isn't just about personal finance; it's a crucial barometer for the health of companies and the entire economy.

Delinquency isn't an on/off switch; it's a slippery slope. A single late payment starts a process that can, if unchecked, lead to severe financial consequences.

Once a payment is officially late, the clock starts ticking, and the consequences escalate in stages:

• 30 Days Delinquent: This is the first major milestone. The lender will typically charge a late fee and report the missed payment to the major credit bureaus (Experian, Equifax, and TransUnion). This single late payment can cause a noticeable dip in your credit score.
• 60 Days Delinquent: Things are getting more serious. The lender's communications will become more frequent and insistent. This second missed payment will cause further damage to your credit score.
• 90 Days Delinquent: At this point, you are considered a significant credit risk. Lenders may take more drastic actions, such as lowering your credit limit or closing your account. The hit to your credit score will be severe and can impact your ability to get new loans for years.

If a delinquency continues for an extended period (typically 90 to 180 days, depending on the loan), the lender will declare the loan in default. This is no longer just a late payment; it's a formal breach of the loan agreement. A default triggers the lender’s most powerful tools to recover their money. For a mortgage, this means foreclosure, where the lender seizes the house. For a car loan, it means repossession. After a loan defaults, the lender may perform a charge-off. This is an accounting move where they declare the debt a loss on their books. However, this does not mean the debt is forgiven. The borrower still owes the money, and the lender will often sell the debt for pennies on the dollar to a debt collection agency, which will then pursue the borrower for payment.

From a value investing perspective, delinquency rates are far more than just a measure of consumer hardship; they are a vital source of information for making smart investment decisions.

Rising delinquency rates across the country act as an early warning system for the economy. When a growing number of people struggle to pay their mortgages, auto loans, or credit cards, it signals that consumer financial health is deteriorating. This can be a leading indicator of an economic slowdown or recession. Astute investors monitor these trends closely. If auto loan delinquencies are spiking, it might be a bad time to be invested in car manufacturers or lenders specializing in subprime auto loans. Tracking these numbers helps you gauge the economic weather before the storm hits.

For a value investor analyzing a bank or lending institution, the delinquency rate on its loan portfolio is a critical key performance indicator (KPI). A company is only as healthy as its customers.

• High Delinquency Rates: A high or rapidly increasing delinquency rate can be a massive red flag. It may suggest the company has poor underwriting standards (i.e., it's lending money too recklessly) or that its customer base is financially fragile. This can lead to significant losses and erode shareholder value.
• Low Delinquency Rates: Conversely, a lender with consistently low delinquency rates demonstrates disciplined underwriting and a high-quality, resilient customer base. This is often a hallmark of a well-managed, durable business—exactly the kind of company value investors love to find.

Where there is trouble, there can also be opportunity. When loans become delinquent and default, they are often bundled together and sold at a steep discount to their original value. This creates a market for distressed debt. For sophisticated investors with a strong stomach for risk, buying these troubled assets can be a form of deep value investing. The strategy is to buy the debt for cents on the dollar, betting that you can recover more than you paid. It's a high-risk, high-reward field that's not for the faint of heart, but it all starts with that first missed payment.