Today we are writing about the default rate and the recovery rate of the defaulted loans.
How is the default rate calculated?
Some of you have asked us different questions about the default rate. In order to answer them, we first need to give a definition of the default rate. In our case, a loan is considered defaulted when a borrower has missed a scheduled payment by more than 60 days (or, in other words, the loan is 60+ days overdue).
The default rate is calculated as a proportion of Bondora’s loan portfolio. For example, if the loan portfolio is 10m € and the defaulted amount is 1m €, then the default rate is 10%. However, if the loan portfolio grows faster than loans go into default, then the default rate will seem to drop (because there is not enough time for new loans to default yet).
If the portfolio stops growing (e.g. you stop investing), then the rate will seem to grow. As more loans mature and a portion of investments is repaid every month, it leads to a higher defaults proportion and thus a seemingly higher default rate.
This brings us to a fluctuation where the average default rate can be at around 5%, but due to faster and slower growth of the portfolio, it can move by several percentage points in either direction over time. With a faster portfolio growth the proportion of defaults is reduced, but with portfolio maturity the average default rate goes up again.
In addition, the fluctuation of the default rate may be influenced by the monthly and yearly seasonality of the default rate, as explained in our investment guide.
What is the recovery rate of the defaulted loans?
Our historical performance has shown that the major part of the recovery process occurs after 1,5 years have passed since the loan issuance date.
However, even for the loans issued before June 2013 the recovery rate is 52%. This means that the defaulted loans, issued before 2013, have recovered significantly better than 52%. Those loans, which were issued in 2013, have not had enough time for a full recovery yet. Based on the historical data, we expect the majority of currently defaulted loans to still recover in the future.
P.S. Please note, that the recovery rates only affect a small proportion of your loans (the defaulted loans). We recommend to dedicate most of your attention to the net returns after default rate, which affects the net returns of your investments the most. If it meets your investment goals, then any recovery rate would be a bonus increasing returns.