What Is a Nonperforming Loan (NPL)?

Table of Contents

What Is a Nonperforming Loan (NPL)?

Let me explain what a nonperforming loan, or NPL, really is. It's a loan that's gone into default because the borrower hasn't made the scheduled payments for a specific period, usually between 90 and 180 days. This includes missing out on both principal and interest. As someone who's looked into this, I can tell you that NPLs can seriously damage your credit rating if you're the borrower, making it tougher to get loans in the future. They tend to pop up more during economic slumps when people are struggling financially. To get a full picture, you need to understand the types, causes, and effects of NPLs, plus how they might turn back into performing loans through smart fixes.

Key Takeaways on NPLs

Here's what you should know right away about nonperforming loans. An NPL is when the borrower hasn't made payments for a set time, like 90 or 180 days, depending on the loan type. These can shift to reperforming loans if payments start again, even if past dues aren't fully paid. Remember, the Fair Debt Collection Practices Act limits harsh tactics for collecting on NPLs, but only for third-party collectors, not the original lender. Economic tough times spike NPLs because borrowers can't keep up. Banks or investors often buy these NPLs cheap, which can be smarter than chasing the borrower yourself.

Understanding the Mechanics of Nonperforming Loans

Let's dive into how nonperforming loans actually work. An NPL is in default or close to it, meaning the borrower probably won't pay it back fully. If you, as the borrower, start paying again on an NPL, it becomes a reperforming loan, or RPL, even without clearing all the missed amounts. In the banking world, commercial loans hit nonperforming status after 90 days without payments, while consumer loans take 180 days. A loan goes into arrears with late or missed principal or interest, and into default when the agreement is broken and obligations can't be met.

Different Varieties of Nonperforming Loans

You might wonder about the ways a loan becomes nonperforming. There are a few scenarios: for instance, if 90 days' interest has been capitalized, refinanced, or delayed by agreement. Or if payments are under 90 days late but the lender doubts future payments will happen. Another case is when the maturity date passes but part of the loan is still unpaid. Keep in mind, the Fair Debt Collection Practices Act stops abusive collection on personal NPLs, but it only covers third-party collectors, not the original lender.

Official Guidelines for Defining Nonperforming Loans

International bodies have clear rules on this. Take the European Central Bank (ECB): they classify loans as nonperforming if they're 90 days past due, impaired under accounting standards like U.S. GAAP or IFRS, or in default per regulations. They even set timelines for reserving funds against NPLs, from two to seven years depending on security. By 2020, eurozone banks had about $1 trillion in these. The International Monetary Fund (IMF) defines them similarly: no payments for 90 days or more, interest capitalized or delayed for that period, or high uncertainty on future payments even if delays are shorter.

Comparing Nonperforming and Reperforming Loans

It's important to distinguish between nonperforming and reperforming loans. NPLs are straight-up in default. RPLs were once NPLs but now have payments resuming after at least 90 days of delinquency. Often, this happens in bankruptcy where the borrower keeps paying under a new agreement, like a loan modification to get current.

Real-World Example of a Nonperforming Loan

Picture this: you lose your job and can't pay your loan. After 90 days, the lender labels it nonperforming and starts collection efforts. They might send it to a collections agency that takes a cut of recoveries, or sell it cheap to a debt buyer. Selling often makes more sense financially than endless pursuit. As the borrower, you could negotiate forgiveness, but that hits your credit hard, complicating future loans.

Frequently Asked Questions About NPLs

You might have questions like what happens to NPLs—they can be sold to other banks or investors, or become reperforming with resumed payments, or lead to repossession of collateral. Causes? Economic hardships lead to high delinquencies after 90-180 days without payment. Banks sell them to prioritize paying loans over chasing bad ones. Buyers include other banks, distressed debt investors, or real estate folks. To fix one, get a loan modification to restart payments.

The Bottom Line

In the end, nonperforming loans surge in uncertain economies when borrowers can't or won't pay. The loan hits NPL status after no payments for 90 or 180 days, depending on the lender. That's the core of it—straightforward but with big impacts for everyone involved.

What Is a Nonperforming Loan (NPL)?

Highlights