What Is a Nonaccrual Loan?

What Is a Nonaccrual Loan?

Let me explain what a nonaccrual loan is—it's an accounting term in the lending world for an unsecured loan that stops generating its expected interest because the borrower hasn't made a payment in 90 days or more. For you as a lender, this turns it into a nonperforming loan, or NPL, meaning it's not earning the interest you counted on.

You see, loans only produce interest income when the borrower pays, with part going to interest and the rest to principal. If no interest payments come in, that expected income doesn't accrue, so the loan goes nonaccrual. People sometimes call these doubtful loans, troubled loans, or sour loans.

Key Takeaways

Here's what you need to know: a lending institution marks an unsecured debt as nonaccrual if payments stop for 90 days or more. In accounting, this means the lender can't count on that interest as income since nothing's been paid. But if you're the borrower, you can often negotiate a repayment plan to get the loan back to normal status.

How a Nonaccrual Loan Works

When payments haven't come in for 90 days, the loan shifts to nonaccrual status. The bank labels it substandard and reports it to credit agencies, which hits your credit score if you're the borrower. The lender adjusts their allowance for loan losses, sets aside reserves to safeguard their finances, and might even pursue legal action against you.

Lenders expect regular payments of principal and interest, so they usually assume that income. But once it's nonaccrual, they switch it to a cash basis—no more assuming interest; it's only recorded when actually collected. According to the FDIC, an asset goes nonaccrual if it's on cash basis due to the borrower's poor finances, if full payment isn't expected, or if principal or interest is 90 days past due—unless it's well-secured and in collection. A well-secured asset has collateral like a lien, property pledge, or a guarantee from someone financially solid.

Returning a Loan to Accrual Status

If your loan is in nonaccrual, you can typically work with the lender to create a plan to pay it off and restore it. For instance, pay up all overdue principal, interest, and fees, then resume regular monthly payments as per the contract—that gets it back to accrual.

Another way is to restart scheduled payments for six months and give the lender confidence that you'll cover the rest within a set time. Or, you could provide collateral to secure the loan, pay the balance in 30 to 90 days, and keep up monthly payments.

Troubled Debt Restructuring

After checking your income and expenses, the lender might set up a troubled debt restructuring, or TDR. This could involve forgiving part of the principal or interest, cutting the interest rate, switching to interest-only payments, or tweaking terms in other ways. They'd accept lower payments until your finances improve.

Can Any Loan Become Nonaccrual?

Lenders can put nearly any loan into nonaccrual if payments are 90 days late, but secured loans with strong collateral—like a mortgage on a house—are exceptions. If those default, the lender can just take the collateral and sell it to recover the money.

What Are the Requirements for Troubled Debt Restructurings (TDRs)?

The Office of the Comptroller of the Currency (OCC) outlines accounting and reporting rules for TDRs on nonaccrual loans. If you're in financial trouble, talk to your lender to see if a TDR fits your situation.

What Does Cash-Basis Loan Mean?

Cash basis means the loan is in nonaccrual because the lender hasn't gotten interest for 90 days or more. They can't record it as accrued income anymore—it's cash basis only, recorded when paid.