Loading the player...

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.

RELATED TERMS
  1. Non-Performing Asset - NPA

    A classification used by financial institutions that refer to ...
  2. Nonperforming Asset

    A debt obligation where the borrower has not paid any previously ...
  3. Problem Loan

    In the banking industry, a problem loan is one of two things; ...
  4. Credit Crisis

    A credit crisis is a crisis that occurs when several financial ...
  5. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  6. Loan

    The act of giving money, property or other material goods to ...
Related Articles
  1. 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.
  2. Taxes

    What Qualifies as a Nonperforming Asset?

    A nonperforming asset is a loan made by a financial institution to a borrower who has failed to make any scheduled payments for at least 90 days.
  3. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  4. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  5. Personal Finance

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  6. Investing

    Wells Fargo's 3 Key Financial Ratios (WFC)

    Look at some of most important financial ratios for with Wells Fargo & Co. and understand why they are so important for analyzing the bank's core business.
  7. Personal Finance

    All About Government Loans

    There are many reasons to seek a government loan rather than one from a private lender. Government loans typically have low interest rates and offer fixed or subsidized options, as well as deferred ...
  8. Financial Advisor

    What to Do When You Can't Repay Your Student Loans

    Student loans should be kept in good standing no matter what. Here are some tips on managing your loans.
  9. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
RELATED FAQS
  1. Why do banks write off bad debt?

    Learn more about the practice of banks writing off bad debts and removing them from their books, including a hypothetical ... 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 special powers does the government have to collect student loans?

    Contact student loan companies before student loans default, as the government has the power to get its money. Prior to default, ... Read Answer >>
  4. 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. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center