Default Rate: An Important Economic Measure

The default rate is one of the primary economic indicators which economists use to assess the overall health of the economy. This statistic measures the percentage of all outstanding loans which are written off after a specified period of time due to a prolonged lack of payments. Typically, a loan is declared in default if it is over 270 days late.

Default rates are important indicators of the amount of risk lenders are comfortable accepting. When the economy and overall financial health of citizens is stable, the default rate among lenders is usually low. Conversely, if the economy is poor and the overall financial condition of citizens is fragile, the riskier lending practices are prevalent, and the overall default rate increases.

Default rates also influence a lender's ability to extend credits or loans and the terms of that credit or potential loan. Lenders, who feel comfortable with a low default rate and have the necessary security to loan money, can offer lower interest rates than those who have a high default rate.

The default rate is an essential measure of the financial health of lenders and consumers alike. Low overall default rates indicate a stable economy and comfortable lending practices, while high default rates can signify recession or worse. Consequently, careful monitoring of the default rate is necessary for lenders, investors, and economists alike in order to gauge the current financial health of the public.