Nonperforming Loan - NPL

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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.