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Home » What is a non-performing loan?

What is a non-performing loan?

A non-performing loan (NPL) is a term frequently used in the financial sector to describe a specific type of loan situation. This occurs when a borrower is in default, meaning they have failed to make the required payments on the loan as outlined in the loan agreement. Specifically, a loan becomes non-performing when the borrower has not made any scheduled payments of principal or interest for a designated period of time. In the realm of banking, commercial loans are typically categorized as non-performing when the borrower is 90 days past the due date.

The 90-day mark is a crucial point for lenders and financial institutions. When a loan reaches this stage of delinquency, it often raises red flags regarding the creditworthiness of the borrower. Financial institutions closely monitor the status of loans, especially as they approach the 90-day mark, as it can significantly impact their balance sheets and financial health. A high number of non-performing loans can indicate issues within the lending portfolio and may lead to concerns about the institution’s stability.

For borrowers, being in a non-performing loan situation can have serious consequences. It can damage their credit score and credit history, making it challenging to secure future financing. Additionally, lenders often take collection actions to recover the outstanding debt, which can involve legal proceedings and asset seizure. Overall, non-performing loans are a critical indicator in the financial industry, reflecting both economic and individual financial health.

(Response: A non-performing loan (NPL) is a loan where the borrower has defaulted, failing to make scheduled payments of principal or interest for a specific period, typically 90 days in the case of commercial loans. This status raises concerns about the borrower’s creditworthiness and can impact the lender’s financial stability.)