What is a 'Nonperforming Loan - NPL'

A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made
his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to
being in default. Once a loan is nonperforming, the odds that it will be repaid in full are
considered to be substantially lower.

BREAKING DOWN 'Nonperforming Loan - NPL'

If the debtor starts making payments again on a nonperforming loan, it becomes a reperforming
loan, even if the debtor has not caught up on all the missed payments.
Institutions holding nonperforming loans in their portfolios may choose to sell them to other
investors in order to get rid of risky assets and clean up their balance sheets. Sales of
nonperforming loans must be carefully considered since they can have numerous financial
implications, including affecting the company's profit and loss, and tax situations.
A nonperforming loan is any loan that can reasonably be expected to enter default. Often, if the
loan isn’t already in default, the borrower has failed to make a number of payments within a
specified period. Most commonly, no payments have been made within 90 days, though a loan
can still qualify even if that time has not yet elapsed.

Lender Rights on Nonperforming Loans

Once a loan is considered nonperforming, lenders may have the opportunity to attempt to recover
the principal. This especially applies to loans backed by specific assets, such as a home loan or
vehicle loan. In these instances, the lender may begin the process of foreclosure, on a home, or
move to seize the property, such as with a vehicle.
In cases where there is no specified asset, such as unsecured lines of credit, the lender may begin
using internal collection services to recover the missing amounts. If extenuating circumstances
are affecting the borrower, the lender may choose to put the loan into forbearance, suspending
the need for payments until the situation changes. Forbearance is more common with student
loans, especially if the borrower is still attending courses or has been unable to secure
employment after graduation.
Collection Agencies
If a borrower still fails to make payments on the debt, the debt may be sold, generally for a
notably reduced price, to an external collection agency. Alternatively, the lender may partner
with a collection agency, offering to perform the service for a percentage of the recovered
amount owed.
At this point, the lender can address any losses based on the difference of the principal owed and
the price the debt was sold or the amount recovered minus any fees. Collection agencies then
attempt to make a profit by securing a payment either in full, or as close to as possible, from the
borrower.
Trading Center
•
•
•
•

Cash Basis Loan

Cash Basis Loan
Share
A loan where interest is recorded as earned when payment is collected. Ordinarily, interest
income is accrued on loans, since regular payment of both principal and interest is assumed.
However, in the case of nonperforming loans (loans gone bad), continuing payments are
doubtful. Cash basis loans are nonperforming loans, and interest income can only be recorded
when funds are actually received.
BREAKING DOWN 'Cash Basis Loan'
Typically, loans are considered to have gone bad when they are in default for 90 days. Different
definitions may apply, however, to consumer loans, residential mortgage loans and other secured
assets.

Nonperforming Asset
Share
Video Definition
A nonperforming asset is a debt obligation where the borrower has not paid any previously
agreed upon interest and principal repayments to the designated lender for an extended period of
time. The nonperforming asset is therefore not yielding any income to the lender in the form of
principal and interest payments.

BREAKING DOWN 'Nonperforming Asset'

For example, a mortgage in default would be considered non-performing. After a prolonged
period of non-payment, the lender will force the borrower to liquidate any assets that were
pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the
asset as a bad debt and then sell it at a discount to a collections agency.

Problem Loan
Share
In the banking industry, a problem loan is one of two things; it can be a commercial loan that is
at least 90 days past due, or a consumer loan that it at least 180 days past due. This type of loan
is also referred to as a nonperforming asset.
BREAKING DOWN 'Problem Loan'
The subprime mortgage meltdown and 2007-2009 recession led to a rise in the number of
problem loans that banks had on their books. Several federal programs were enacted to help
consumers deal with their delinquent debt, most of which focused on mortgages. Problem loans
can often result in property foreclosure, repossession or other adverse legal actions.

Renegotiated Loan
Share
The result of an agreement between a borrower and a lender to modify a loan by taking a loan
that a customer was having difficulty paying and turning it into a loan that the customer can pay.
The loan may be modified by lowering the interest rate, changing it from an adjustable-rate loan
to a fixed-rate loan, lengthening the repayment period or forbearing principal.

A renegotiated loan can benefit both borrowers and lenders. The borrower is able to maintain his
or her credit rating, avoid bankruptcy and retain use of the asset that is tied to the loan (e.g., a
house). The lender, while it may see less benefit (i.e., less interest income) from a renegotiated
loan, retains the customer's business and may have better profits than it would by allowing the
borrower to default.

BREAKING DOWN 'Renegotiated Loan'

BREAKING DOWN 'Renegotiated Loan'
Renegotiated loans, also called loan modifications, were popular in the aftermath of the 2007
housing-bubble burst among homeowners who found themselves unable to pay their mortgages.
A bank will not always agree to renegotiate a loan. Sometimes the bank will see a greater
financial benefit from letting the loan default and getting the nonperforming loan off its books
than from modifying the loan.

Credit Crisis
Share
A crisis that occurs when several financial institutions issue or are sold high-risk loans that start
to default. As borrowers default on their loans, the financial institutions that issued the loans stop
receiving payments. This is followed by a period in which financial institutions redefine the
riskiness of borrowers, making it difficult for debtors to find creditors.
BREAKING DOWN 'Credit Crisis'
In the case of a credit crisis, banks either do not charge enough interest on loans or pay too much
for the securitized loan, or the rating system does not rate the risk of the loans correctly. A crisis
occurs when several factors combine in the marketplace, affecting a large number of investors.
Read More +

Unsecured Loan
Share
Video Definition
An unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness,
rather than by any type of collateral. An unsecured loan is one that is obtained without the use of
property as collateral for the loan, and it is also called a signature loan or a personal loan.
Borrowers generally must have high credit ratings to be approved for certain unsecured loans.

BREAKING DOWN 'Unsecured Loan'

Because an unsecured loan is not guaranteed by any type of property, these loans are bigger risks
for lenders and, as such, typically have higher interest rates than secured loans such as mortgages
or car loans.
What Are Examples of Unsecured Loans?
Unsecured loans include credit cards, student loans and personal loans, and these loans can be
revolving or term loans. A revolving loan is a loan that has a credit limit that can be spent, repaid
and spent again. Examples of revolving unsecured loans include credit cards and personal lines
of credit.
Read More +

Loan
Share
A loan is the act of giving money, property or other material goods to another party in exchange
for future repayment of the principal amount along with interest or other finance charges. A loan
may be for a specific, one-time amount or can be available as an open-ended line of credit up to a
specified limit or ceiling amount.
The terms of a loan are agreed to by each party in the transaction before any money or property
changes hands. If the lender requires collateral, that is outlined in the loan documents. Most
loans also have provisions regarding the maximum amount of interest, as well as other covenants
such as the length of time before repayment is required. A common loan for American
consumers is a mortgage. The mortgage calculator below illustrates the various types of
mortgages and their different terms.
Loans can come from individuals, corporations, financial institutions, and governments. They
offer a way to grow the overall money supply in an economy as well as open up competition and
expand business operations. The interest and fees from loans are a primary source of revenue for
many financial institutions such as banks, as well as some retailers through the use of credit
facilities.

The Difference Between Secured Loans and Unsecured

Loans
Loans can be secured or unsecured. Mortgages and car loans are secured loans, as they are both
backed or secured by collateral.
Loans such as credit cards and signature loans are unsecured or not backed by collateral.
Unsecured loans typically have higher interest rates than secured loans, as they are riskier for the
lender. With a secured loan, the lender can repossess the collateral in the case of default.
However, interest rates vary wildly depending on multiple factors.
Revolving vs. Term Loans
Loans can also be described as revolving or term. Revolving refers to a loan that can be spent,
repaid and spent again, while term refers to a loan paid off in equal monthly installments over a
set period called a term. A credit card is an unsecured, revolving loan, while a home equity line
of credit is a secured, revolving loan. In contrast, a car loan is a secured, term loan, and a
signature loan is an unsecured, term loan.

How Do Interest Rates Affect Loans?

Interest rates have a huge effect on loans. In short, loans with high interest rates have higher
monthly payments or take longer to pay off than loans with low interest rates. For example, if a
person borrows $5,000 on an installment or term loan with a 4.5% interest rate, he faces a
monthly payment of $93.22 for the next five years. In contrast, if the interest rate is 9%, the
payments climb to $103.79.
Similarly, if a person owes $10,000 on a credit card with a 6% interest rate and he pays $200
each month, it will take him 58 months or nearly five years to pay off the balance. With a 20%
interest rate, the same balance and the same $200 monthly payments, it will take 108 months or
nine years to pay off the card.
BREAKING DOWN 'Loan'
Lender
Share
A lender is an individual, a public group, a private group or a financial institution that makes
funds available to another with the expectation that the funds will be repaid, in addition to any
interest and/or fees, either in increments (as in a monthly mortgage payment) or as a lump sum.
Lenders may provide funds for a variety of reasons, such as a mortgage, automobile loan or
small business loan. The terms of the loan specify how the loan is to be satisfied, over what
period and the consequences of default.
One of the largest loans consumers take out is a mortgage. Below are examples of lenders for
such loans.

Factors Determining Loan Qualification

Qualifying for a loan depends largely on the borrower's credit history. The lender examines the
borrower's credit report, which details the names of other lenders extending credit, what types of
credit are extended, the borrower's repayment history and more. The report helps the lender
credit are extended, the borrower's repayment history and more. The report helps the lender
determine whether the borrower is comfortable managing payments based on current
employment and income. The lender may also evaluate the borrower's current and new debt
compared to before-tax income to determine the borrower's debt-to-income (DTI) ratio. Lenders
may also use the Fair Isaac Corporation (FICO) score in the borrower's credit report to determine
creditworthiness and help make a lending decision.
When applying for a secured loan, such as an auto loan or a home equity line of credit, the
borrower pledges collateral. The value of the collateral is evaluated, and the existing debt
secured by the collateral is subtracted from its value. The remaining equity affects the lending
decision.
The lender evaluates a borrower's capital, including savings, investments and other assets that
may be used to repay the loan if household income is insufficient. This is helpful in case of a job
loss or other financial challenge.
The lender may ask what the borrower plans to do with the loan, such as buy a vehicle or other
property. Other factors may also be considered, such as environmental or economic conditions.

Small Business Lenders

Banks, savings and loans, and credit unions may offer Small Business Administration (SBA)
programs and must adhere to SBA loan guidelines. Private institutions, angel investors, and
venture capitalists lend money based on their own criteria as well as the nature of the business,
the character of the business owner and the projected annual sales and growth.

Repayment of Small Business Loans

Small business owners prove their ability for loan repayment by providing lenders both personal
and business balance sheets detailing their assets, liabilities and net worth. Although business
owners may propose a repayment plan, the lender has the final say on the terms.
BREAKING DOWN 'Lender'
Term Loan
Share
Video Definition
A term loan is a loan from a bank for a specific amount that has a specified repayment schedule
and a fixed or floating interest rate. For example, many banks have term-loan programs that can
offer small businesses the cash they need to operate from month to month. Often, a small
business uses the cash from a term loan to purchase fixed assets such as equipment for its
production process.
A term loan is for equipment, real estate or working capital paid off between one and 25 years.
The loan carries a fixed or variable interest rate, monthly or quarterly repayment schedule, and
set maturity date. The loan requires collateral and a rigorous approval process to reduce the risk
of repayment. A term loan is appropriate for an established small business with sound financial
statements and a substantial down payment to minimize payment amounts and total loan cost.

Types of Term Loans

An intermediate-term loan runs less than three years, is paid in monthly installments from a
company’s cash flow and may have balloon payments. Repayment is tied to the useful life of the
asset financed. A long-term loan runs for three to 25 years, is collateralized by a company’s
assets and requires monthly or quarterly payments from profits or cash flow. The loan limits
other financial commitments the company may take on, including other debts, dividends or
principals’ salaries, and can require an amount of profit to be set aside for loan repayment.
Example of Term Loan
A Small Business Administration (SBA) loan encourages long-term financing. Short-term loans
and revolving credit lines are also available for assistance with a company’s short-term and
cyclical working capital needs. Maturities for long-term loans vary according to ability to repay,
cyclical working capital needs. Maturities for long-term loans vary according to ability to repay,
purpose of loan and useful life of the financed asset. Maximum loan maturities are seven years
for working capital, 10 years for equipment and 25 years for real estate. A loan is repaid with
monthly payments of principal and interest.
A fixed-rate loan payment remains the same because the interest rate is constant; a variable-rate
loan requires a different payment amount when the interest rate changes. A lender may establish
an SBA loan with interest-only payments during a company’s startup or expansion phase; the
business then has time to generate income before making full loan payments. Balloon payments
are not allowed on most SBA loans. The SBA charges the borrower a prepayment fee only if the
loan has a maturity of 15 years or more and is prepaid in the first three years. Every loan is
secured by all available business and personal assets until the recovery value equals the loan
amount or until all assets are pledged as reasonably available.
BREAKING DOWN 'Term Loan'
Read more: Nonperforming Loan (NPL)
http://www.investopedia.com/terms/n/nonperformingloan.asp#ixzz4jRYQG8Qn
Follow us: Investopedia on Facebook