Delinquent means “something or someone who fails to accomplish that which is required by law, duty, or contractual agreement, such as the failure to make a required payment or perform a particular action.”
In financing and investing, delinquency occurs when a person or business with an obligation to make payments against a debt, such as loan payments, does not make those payments on time or in a regular, appropriate manner. The term "delinquent" usually refers to a situation where a borrower is late or overdue on a payment, such as for income taxes, a mortgage, an automobile loan, or a credit card account.
“Delinquent” could also refer to the failure to perform a duty or act in a manner expected of a person in a particular profession. For example, if an insurance company fails to warn a policyholder that her policy is in danger of lapsing due to insufficient payments, the insurer could be considered delinquent in its duty to alert the customer.
How Delinquency Works (With Example)
When an account or obligation remains unpaid for several billing cycles, or as otherwise outlined in the loan agreement, it is considered to be delinquent.
There are negative outcomes for being delinquent, depending on the type of debt owed, how long it’s been owed, and the reason for the delinquency. For example, people who are late with a credit card payment will usually pay a late fee. With a mortgage, the lender can begin foreclosure proceedings if the mortgage payments are not caught up to date within a certain period.
Most lenders will report delinquent accounts to the credit bureaus—the agencies who generate credit reports—90 days after a payment is missed, which will trigger a drop in the borrower's credit score. Missing one payment and being delinquent for 90 days may result in a credit score drop of 30 points or more; conversely, maintaining on-time payments for 12 months straight will typically raise your score just 5-10 points.
According to Federal Reserve bank statistics, delinquency rates in the U.S., have been steadily declining. In 2010, more than 11% of home loans were in some type of delinquent state. The current rate of real estate is less than 2%.
What Is the Difference Between Delinquency and Default?
The primary risk of not paying back a delinquent loan is that the account goes into default.
A loan is considered to be in default if the borrower fails to repay it on the terms that were agreed to in the loan contract. While having a temporarily delinquent account can be amended by making consistent payments in the future, it is much more difficult to resolve a defaulted loan—especially if you don't have a lot of cash on hand.
Creditors will usually allow a loan to remain delinquent for some time before considering it to be in default, in hopes of getting some of the money owed (plus the fees associated with the delinquency). The allowances are specific to each case and type of loan.
With personal loans and business loans, the rules for default vary by lender, but the timeline for serious action usually begins after a 30-day grace period. For loans backed by collateral, known as "secured loans," loan servicers can seize assets to repay the debt. For a business, this could mean that equipment is taken or that future revenue is promised to the lender. For an individual, this could mean a physical asset like a car or house is repossessed.
For personal loans not backed by collateral, lenders will often add late fees and penalty interest rates after missed payments. Similar to credit card delinquency, debt collection agencies will begin contacting a borrower after their delinquent loan goes into default.
For business loans not secured by collateral, lenders are likely to renegotiate the terms of the loan or write off the debt altogether—although this can severely affect the borrower’s ability to receive credit in the future. As with other loans, it's best to determine with your loan servicer whether there are alternative payment plans before accepting loan default.
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