What Is The Definition of Charge-Off?

A Charge-off is a financial industry term that means a loan is likely not going to be paid by the borrower and will likely become a tax write-off for the lending entity.

When the borrower defaults on their loan payments for many months in a row, the lender (which is usually a sub-prime lender) will assume that they will not collect on their advance and henceforth report the monies as bad debt.

I certain estimated amount of bad debt due to Charge-offs is reported by lending companies to their lenders. Financial institutions always allow for a percentage of Charge-offs in their yearly reports.

Of course, if a sub-prime borrower takes a high risk personal loan – such as a Payday Loan – and is completely delinquent at some point, their credit rating will be severely damaged due to their delinquency reported back to the credit reporting agencies such as Transunion, Equifax, Experian, Fair Isaac, and Teletrack.

Creditors track all of the borrowers that default on loans – so badly that their loan is put in the Charge-off category by the lender. They also track whether or not a Charge-off is ultimately paid off at a later date.

You don’t hear the term Charge-off much in everyday consumer lending because it is more of an industry term.

In this graph we can see the average Charge-off percentage rates from the turn of the century until the beginning of 2009. Take notice of the steep fluctuations in Charge-offs between mid-2006 and late 2008, due to sub-prime mortgage backed securities disaster of the time.

A tip to borrowers who may be deliquent on their loans for a period of over three months – don’t think for a second that if your loan is thrown into the Charge-off category that there is no difference in the damage to your credit rating whether you pay back the loan or not. It makes a HUGE difference if you pay back all that you owe later down the road. It’s all tracked.

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This was written by . Posted on Friday, January 9, 2009, at 2:46 pm. Filed under Glossary. Tagged Bad Debt, borrower defaults, charge-off, credit reporting agencies, experian, high risk personal loan, payday loan, teletrack. Bookmark the permalink. Follow comments here with the RSS feed. Post a comment or leave a trackback.

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