What Is a Nonperforming Loan (NPL)?

A nonperforming loan (NPL) is a loan that hasn’t been paid in a certain period of time, usually for more than 90 days. It occurs when a borrower lacks the funds to make monthly payments.

A nonperforming loan (NPL) is a loan that hasn’t been paid in a certain period of time, usually for more than 90 days. It occurs when a borrower lacks the funds to make monthly payments.

Definition and Example of a Nonperforming Loan

Most banks and lenders in the U.S. consider a loan to be nonperforming when a borrower hasn’t made principal and interest payments for more than 90 days. Once a loan becomes nonperforming, the chance of default by the borrower increases significantly.

For example, let’s say you take out a $10,000 personal loan to cover a medical bill. You agree to make a $1,000 payment by the last day of every month. If you were to lose your job and not make payments for 100 days, your personal loan would be considered a nonperforming loan.

Note

Job loss, serious injury or illness, the death of a loved one, or another situation that leads to financial hardship may put you at risk of a loan being considered nonperforming. It may be wise to have a backup plan in place, such as an emergency fund, to help prevent this from happening.

How a Nonperforming Loan Works

While it depends on the terms of the agreement, the lender, and even the country, most loans are considered to be nonperforming if payments are more than 90 days past due. They are usually considered in default or close to default at that time, depending on the lender.

If payments resume, the nonperforming loan turns into a reperforming loan. This occurs even if the borrower is not completely caught up on their payments.

Note

If you have a secured loan that turns into a nonperforming loan, the lender may seize the collateral used for the loan, such as your house, car, or any other asset you pledged.

Banks and other lenders may sell nonperforming loans to get rid of risky assets on their balance sheets. They can sell them to asset management companies (AMCs), which buy pooled funds from clients and invest them into various securities and assets.

Another option for banks is to sell their nonperforming loans to collection agencies at discounted rates. By selling them, banks can recover at least a portion of the funds they lost.

Types of Nonperforming Loans

A loan is usually considered a nonperforming loan if principal and interest payments are at least 90 days past due and the lender believes the borrower will not be able to repay their loan. If this is the case, the lender will write it off as a bad debt.

If changes in the loan agreement lead to payments that are 90 days capitalized, refinanced, or delayed, the loan is also considered nonperforming. In addition, if payments are less than 90 days overdue but the lender has reason to believe the borrower won’t repay the loan in full, the loan will be put in the nonperforming category as well.

The Impact of Nonperforming Loans on Banks

Lenders earn a bulk of their money from the interest they charge on their loans. While banks and lenders usually have a reserve of money to help cushion losses, if they can’t collect the interest payments they’re owed, they may be at risk of paying for operating costs and distributing new loans.

Banks must report their ratio of nonperforming loans, and this ratio measures their loan quality and level of credit risk. An excessive amount of nonperforming loans can deter investments from lenders. It may also lead to close monitoring by the Federal Deposit Insurance Corporation (FDIC), which protects those in risky funding situations.

Key Takeaways

• A nonperforming loan is a loan that a borrower hasn’t paid in a certain period of time, usually more than 90 days.
• The risk of default increases significantly after a loan becomes nonperforming.
• Nonperforming loans can have a negative impact on banks and lenders who depend on interest payments to succeed.

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. Federal Reserve Bank of San Francisco. "Not All NPLs Are Created Equal."
2. International Monetary Fund. "The Treatment of Nonperforming Loans."

• About Us
• Privacy Policy
• Editorial Guidelines
• Terms of Service
• Diversity and Inclusion Pledge
• Advertise
• Careers
• Contact
• EU Privacy

We Care About Your Privacy

We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.

We and our partners process data to provide:

Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)