when no payment has been received for 90 days a loan becomes nonaccrual the bank classifies the loan as substandard and reports the change to the credit reporting agencies which lowers the borrower s credit score 
the lender also changes its allowance for the potential loan loss sets aside a reserve to protect the bank s financial interests and may take legal action against the borrower since regular payment of both principal and interest is expected by the lender interest income from loans is usually assumed when a loan becomes nonaccrual the interest is no longer an assumed payment so the loan is put on a cash basis interest will be recorded as income again only if payment is eventually collected according to the federal deposit insurance corporation fdic an asset should be reported as being in nonaccrual status if one of three criteria is met an unaccrued loan is classified as substandard and the borrower is reported to credit agencies returning a loan to accrual statusafter entering nonaccrual status the borrower can usually work with the lender to determine a plan for paying off the debt for example a loan can be returned to accrual status if the borrower pays all the overdue principal interest and fees and resumes the regular monthly payments defined in the contract if both parties agree another option involves resuming the scheduled principal and interest payments for six months and providing the lender reasonable reassurance that the outstanding principal interest and fees will be paid within a set period of time a third option requires the borrower to provide collateral for securing the loan to the lender repaying the outstanding balance within 30 to 90 days and resuming monthly payments after reviewing the borrower s income and expense status another option is for the lender to create a troubled debt restructuring tdr the tdr may erase part of the loan s principal or interest payments lower the interest rate allow interest only payments or modify the repayment terms in some other way lower debt payments may be accepted until the borrower s financial situation improves can any loan become nonaccrual lenders can put almost any loan into nonaccrual status if payments are 90 days behind with the exception of secured loans backed by solid collateral e g a mortgage backed by a house if a secured loan goes into default the lending institution can seize the collateral and liquidate it to recover the unpaid balance 