What is a 'Nonaccrual Loan'

A nonaccrual loan is a nonperforming loan that is not generating its stated interest rate because of nonpayment from the borrower. Nonaccrual loans are more likely to default, meaning that the lender will not receive its principal and interest unless the lender has adequate collateral to cover the loan. Because these loans can have interest credited only when the borrower makes a payment, the interest on a nonaccrual loan is recorded as earned income.

BREAKING DOWN 'Nonaccrual Loan'

After 90 days of nonpayment, a loan is placed on nonaccrual status, and interest stops accumulating. The bank classifies the loan as substandard and reports the change to the credit reporting agencies, which lowers the borrower's credit score. The lender changes its allowance for the potential loan loss, sets aside a reserve to protect the bank's financial interests and may take legal action against the borrower.

Restructuring a Loan

After entering nonaccrual status, the borrower typically works with the lender in determining a plan for paying off the debt. After reviewing the borrower's income and expense status, the lender may create a troubled debt restructure (TDR). The TDR may erase part of the loan's principal or interest payments, lower the interest rate, allow interest-only payments or modify repayment terms in other ways. Lower debt payments may be made until the borrower's monetary circumstances improve. The lender may recoup at least its principal rather than losing its entire investment.

Returning a Loan to Accrual Status

One option for returning a loan to accrual status involves the borrower paying all overdue principal, interest and fees and resuming monthly payments as outlined in the contract. Another involves keeping current with scheduled principal and interest payments for six months and providing the lender reasonable reassurance that the outstanding principal, interest and fees will be paid within a set amount of time. A third option requires the borrower providing the lender collateral for securing the loan, repaying the outstanding balance within 30 to 90 days, and resuming monthly payments as detailed in the contract.

Example of a Nonaccrual Loan

In the fourth quarter of 2015, a $91.5 million loan from Ares Capital to Instituto de Banca y Comercio, a private school operator in Puerto Rico, was on nonaccrual status. When Ares assumed the loan, the company's main balance sheet already had $60 million at cost and $49 million at fair market value (FMV) in loans to the school operator. After taking on the additional debt, the loan was converted to preferred and non-income producing, giving Ares investments costing $127 million with a FMV of $101 million. None of the investments appeared to be paying current income. Ares believes the school operator will turn around and the debt will be repaid.

RELATED TERMS
  1. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  2. Non-Performing Asset - NPA

    A classification used by financial institutions that refer to ...
  3. Closed-End Credit

    A loan or extension of credit in which the proceeds are dispersed ...
  4. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  5. Renegotiated Loan

    The result of an agreement between a borrower and a lender to ...
  6. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
Related Articles
  1. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  2. Personal Finance

    Interest-Only Mortgages: Home Free Or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  3. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  4. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  5. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  6. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  7. Taxes

    What's a Nonperforming Loan?

    A nonperforming loan is any borrowed sum where the borrower has failed to pay scheduled payments for at least 90 days.
  8. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  9. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
RELATED FAQS
  1. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  2. What is the difference between secured and unsecured debts?

    Learn the differences between secured and unsecured debt; discover how banks buffer risks associated with each type of loan ... Read Answer >>
  3. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  5. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  2. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  4. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Blind Trust

    A trust in which the trustees have full discretion over the assets, and the trust beneficiaries have no knowledge of the ...
Trading Center