how a nonperforming loan npl works
a nonperforming loan npl is considered in default or close to default once a loan is nonperforming the odds the debtor will repay it in full are substantially lower if the debtor resumes payments again on an npl it becomes a reperforming loan rpl even if the debtor has not caught up on all the missed payments in banking commercial loans are considered nonperforming if the debtor has made zero payments of interest or principal within 90 days or is 90 days past due for a consumer loan 180 days past due classifies it as an npl a loan is in arrears when principal or interest payments are late or missed a loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet the obligations types of nonperforming loans npls a debt can achieve nonperforming loan status in several ways examples of npls include the fair debt collection practices act prohibits certain abusive or deceptive practices in order to collect on nonperforming personal loans however this law only applies to third party debt collectors or debt investors not the original lender 1official definitions of nonperforming loans npls several international financial authorities offer specific guidelines for determining nonperforming loans the european central bank ecb requires asset and definition comparability to evaluate risk exposures across euro area central banks the ecb specifies multiple criteria that can cause an npl classification when it performs stress tests on participating banks the ecb has performed a comprehensive assessment and developed criteria to define loans as nonperforming if they are an addendum issued in 2018 specified the time frame for lenders to set aside funds to cover nonperforming loans two to seven years depending on whether the loan was secured or not as of 2020 eurozone lenders still have approximately 1 trillion worth of nonperforming loans on their books 3the international monetary fund imf also sets out multiple criteria for nonperforming government loans 4the imf has defined nonperforming loans as those whose nonperforming loans may damage the credit rating of the borrower making it harder and more expensive to borrow money in the future nonperforming loan npl vs reperforming loan rpl nonperforming loans are those in default reperforming loans are those that were once nonperforming and are now performing again the reperforming loans were once delinquent for at least 90 days and are now performing again reperforming loans are often loans where the borrower has filed for bankruptcy and has continued to make payments as a result of the bankruptcy agreement such an agreement generally allows the borrower to become current on their debt via a loan modification program example of a nonperforming loan npl imagine a hypothetical borrower who cannot make loan payments due to job loss after 90 days without payment the bank or lender will consider the loan nonperforming the bank would shift the loan to their nonperforming list and continue seeking payment for the debt there are multiple avenues available to the creditor one of the most common ways to collect the debt is to send it to a collections agency which will be paid a percentage of any money they recover the lender can also sell the debt to a debt buyer at a fraction of the face value although the creditor will lose money this is often a better financial choice than trying to collect on a nonperforming loan borrowers with nonperforming loans may be able to negotiate with creditors to forgive part of their debt however this may damage their credit rating making it harder and more expensive to borrow in the future 