Definition of Default Rate
What is a “default rate”? What is meant by the term “default rate”? What is the definition of “default rate”?
The “default rate” is expressed by this formula:
(Number of Debt Holders Who Default / Total Number of Debt Holders) * 100
So, for instance, if we have a total of 100 debt holders and 15 end up defaulting on their debt, then our default rate would be 15%.
Default rates (for obvious reasons) tend to increase in tough economic times and decrease in times of economic prosperity. The reason is simple - the less money that people have (due to higher unemployment, etc), the less able they are to make debt payments.
Default rates help borrowers to determine how much interest they should charge for their credit.
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