Net charge-off rate

Net charge-off rate is the amount of loans charged off as uncollectable, minus recoveries, divided by the average outstanding balance for the period. Lenders usually annualise the result to express it as a yearly rate. A charge-off often happens at 120 or 180 days past due.

Example

For illustration, a lender charges off $12,000 and recovers $2,000 during a month. Against an average outstanding balance of $4,000,000, the net charge-off rate is 0.25% for the month, or about 3% annualised.

How to calculate the net charge-off rate

Use gross charge-offs for the period, then subtract recoveries. Divide the result by the period’s average outstanding balance to get the rate for that period.

To annualise a monthly rate, multiply it by 12. For a quarterly rate, multiply it by 4. These are annualised rates, not additional charge-offs recorded for the period.

Reading the rate across a lending book

Compare net charge-offs with interest earned to see whether the book earns more than it loses. Compare them with provisions to see whether the provision held covers the losses arriving.

Vintage curves show which origination months the losses come from. Charge-offs lag origination, so losses now may reflect loans made a year or more earlier.

Questions we get asked

The net charge-off rate calculator calculates the annualised rate for a book and each segment, and shows which segments run above the lender’s appetite.