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Loan Default Rate Equation:
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The Loan Default Rate (LDR) equation calculates the percentage of loans within a portfolio that have not been repaid according to the agreed-upon terms. It provides a key metric for assessing the risk and performance of a loan portfolio.
The calculator uses the Loan Default Rate equation:
Where:
Explanation: The equation calculates the ratio of defaulted loans to total loans issued, using the modulus (absolute value) of defaulted loans to ensure a positive result.
Details: Accurate Loan Default Rate calculation is crucial for financial institutions to assess portfolio risk, make informed lending decisions, and maintain regulatory compliance.
Tips: Enter the number of loans defaulted and total number of loans issued. All values must be valid integers (NLD ≥ 0, TNLI ≥ 1).
Q1: Why use modulus in the calculation?
A: The modulus ensures that the number of defaulted loans is always treated as a positive value, preventing negative results in the calculation.
Q2: What is considered a high loan default rate?
A: A high default rate varies by industry and economic conditions, but generally rates above 5-10% may indicate significant portfolio risk.
Q3: How often should loan default rates be calculated?
A: Default rates should be monitored regularly, typically monthly or quarterly, to track portfolio performance and identify trends.
Q4: Are there limitations to this calculation?
A: This calculation provides a simple ratio and doesn't account for loan amounts, recovery rates, or time factors in defaults.
Q5: Should this rate be used for risk assessment?
A: While useful, comprehensive risk assessment should include additional factors such as loan-to-value ratios, borrower credit scores, and economic indicators.