Okay, I see now that I indeed read the formula wrong. Thanks!philip964 wrote: ↑Tue Mar 31, 2020 1:49 pmSo if your making loans. You have the loans that you have made but have not been paid off. Those are the active loans. They could still default. You don't know. But you have the loans you made and were paid off. And you have the loans that defaulted. You have that history.der Teufel wrote: ↑Mon Mar 30, 2020 8:50 pmI stopped reading here. If I run the numbers I get:philip964 wrote: ↑Sat Mar 21, 2020 1:04 pm
So an accountant friend posed this question. Your a lending company with loans- you have payed off loans, loans that defaulted and required repossession and total loans made.
Lets say the name of your lending company is the USA. Here is the data for the USA.
USA
1.Total loans made 143,532
2. Payed off loans 4,865
3. Defaulted loans required repossession 2,572
4. Active loans = (1. - 2. - 3.) = 136,096 loans
5. Percent of loans that defaulted and required repossession = ( 3. /( 2.+ 3.) ) = 34.58 %
2,572 / (4,865 + 143,532) = 2,572 / 148,397 = 0.01733 = 1.73%
1.73% is a lot different from 34.58%
What's up? Someone is way off. Maybe it's me, but if so please explain.
In your calculation you used the Total Loans made (3. / ( 2. + 1.) rather than my formula of ( 3. / 2.+ 3.)
The formula you used is sort of what everyone is hoping for all the active loans will not default. That is sort of the best case and is what people have been saying in the news that the default rate is. 1.73% and that is made up of very old loans with problems.
My formula uses the past history of the loans you have made in this case ( 2,572 / (4,865 + 2572) = .3457 = 34.57%
However, I'd make the point that defaulted loans happen early (or at least earlier than loans that become fully paid back), so it might be inappropriate to ignore all loans still outstanding when trying to figure how many loans will default.
But, while I'd say that's a consideration, it's not something to argue strongly about.
Thanks for clearing up my mistake.