A default occurs when a borrower stops making payments on a loan. Mortgage defaults, for example, often lead to a foreclosure or similar process. Loan default rates for banks show important trends for the economy as a whole, and many analysts use them to determine the state of the real estate market and debt in general. However, average default rates can vary from study to study and are fully dependent on the parameters of each survey, which can lead to many different results that must always be viewed in context.
Average default rates cycle widely through the years. Some generations have different borrowing practices than others, which leads to different default numbers simply based on trends. Economic movements can also make the results cyclical. For example, In the 1970s and 1980s default rates were relatively low, around 2 to 4 percent on average for a variety of loan grades, but in the late 80s and early 90s rates spiked to over 10 percent, before falling back to old levels at the late 1990s and then jumping up again in the late 2000s.
Default rates can also vary widely by country, which makes examining global rates difficult, since mortgage laws can change nation by nation, and may make it easier or more difficult for borrowers to default. For an example, in 2011, bank loan default rates in South Korea rose to 1.17 percent. While this was not goods news for the South Korean market, in the same time frame American default rates were around 4 to 5 percent and much higher for lower-grade loans.
There is also a broad difference between commercial bank loans to businesses and loans to individuals for private reasons. In general, commercial default rates tend to be slightly lower than individual rates, because of greater lender diligence and the larger number of recourses a business has to pay loans. In 2010, American commercial default rates ranged around 4.3 percent, a noticeable improvement from higher numbers in 2008 and 2009.
Another key problem in finding an average loan default rate is the definition of default. If analysts assume that a loan is only defaulted when a lender actually writes it off, the default rate is relatively low. If a default is counted as a loan that is more than a month late and has a high chance of full default, rates can often double or increase even more.