What is a Problem Loan
In the banking and credit markets, 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 (loan).
BREAKING DOWN Problem Loan
Any loan which cannot easily be recovered from borrowers is called a problem loan. When these loans can’t be repaid according to the terms of the initial agreement or in an otherwise acceptable manner, a lender will recognize these as problem loans.
A central piece of credit management is the early recognition of and proactive management of distressed loans, which can protect a lender from exposure to undue risks.
Many companies see a business opportunity in acquiring problem and nonperforming loans. Buying these loans from financial institutions at a discount can be a lucrative business. Companies regularly pay from 1% to 80% of the total loan balance and become the legal owner (creditor). This discount depends on the age of the loan, whether an asset is secured or unsecured, age of debtor, personal or commercial debt classification, and place of residency.
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. Many credit investors who were willing to ride out the mortgage mess are happy today; at times, they were able to acquire assets for pennies on the dollar.