# Nonperforming Loan (NPL) Definitions, Types, Causes, Consequences

## What Is a Nonperforming Loan (NPL)?

A nonperforming loan (NPL) is a loan classified as default because the borrower has missed scheduled payments for a defined period, typically 90 to 180 days. The lack of payments includes both principal and interest. NPLs can significantly affect borrowers' credit ratings and complicate future borrowing attempts. They often arise during economic downturns when many borrowers face financial difficulties. Understanding NPLs involves grasping their types, causes, and consequences, as well as their potential transformation back into performing loans through strategic resolutions.

### Key Takeaways

*   A nonperforming loan (NPL) is a loan where the borrower has not made scheduled payments for a set period, typically 90 or 180 days, depending on the type of loan.
*   Nonperforming loans are often converted to reperforming loans when the borrower resumes payments, although they may not have caught up on missed payments completely.
*   The Fair Debt Collection Practices Act restricts abusive practices when collecting on NPLs, but this only applies to third-party collectors, not original lenders.
*   Economic hardships often lead to an increase in NPLs as borrowers struggle to meet their payment obligations.
*   Banks and investors may purchase NPLs at a discount, which can be more beneficial than the bank attempting to collect from the borrower.

![Nonperforming Loan (NPL)](https://www.investopedia.com/thmb/r3FzF31dv_ct5EeMiWs5KcsS6jw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/nonperformingloan.asp-final-85e5b120bfab46edaaba69cf0519b74a.png)

*— Investopedia / Julie Bang*

## Understanding the Mechanics of Nonperforming Loans

 A nonperforming loan (NPL) is in default or nearing default, which makes it less likely the borrower will repay it fully. If the borrower resumes payments on an NPL, it becomes a [reperforming loan (RPL)](https://www.investopedia.com/terms/r/reperforming-loan.asp), even without catching up on all missed payments.

In banking, commercial loans are nonperforming if no payments are made for 90 days. Consumer loans are nonperforming if they're 180 days overdue.

A loan is in arrears when [principal](https://www.investopedia.com/terms/p/principal.asp) or [interest](https://www.investopedia.com/terms/i/interest.asp) 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.

## Different Varieties of Nonperforming Loans

A debt can achieve nonperforming loan status in several ways. Examples of NPLs include:

*   A loan in which 90 days' worth of interest has been capitalized, refinanced, or delayed due to an agreement or an amendment to the original agreement.
*   A loan in which payments are less than 90 days late, but the lender no longer believes the debtor will make future payments.
*   A loan in which the maturity date of principal repayment has occurred, but some fraction of the loan remains outstanding.

> **Tip**
>
> 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.

## Official Guidelines for Defining Nonperforming Loans 

Several international financial authorities offer specific guidelines for determining nonperforming loans.

### European Central Bank's Criteria for Nonperforming Loans

The [European Central Bank](https://www.investopedia.com/terms/e/europeancentralbank.asp) (ECB) requires asset and definition comparability to evaluate risk exposures across euro area [central banks](https://www.investopedia.com/terms/c/centralbank.asp). 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:

*   90 days past due, even if they are not defaulted or impaired
*   Impaired with respect to the accounting specifics for [U.S. GAAP](https://www.investopedia.com/terms/g/gaap.asp) and [International Financial Reporting Standards](https://www.investopedia.com/terms/i/ifrs.asp) (IFRS) banks
*   In default, according to the Capital Requirements Regulation

A 2018 addendum set a two- to seven-year timeframe for lenders to reserve funds for nonperforming loans, based on if the loan is secured. By 2020, eurozone lenders held around $1 trillion in nonperforming loans.

### International Monetary Fund's Standards for Nonperforming Loans

The [International Monetary Fund](https://www.investopedia.com/terms/i/imf.asp) (IMF) also sets out multiple criteria for nonperforming government loans.

The IMF has defined nonperforming loans as those whose:

*   Debtors have not paid interest or principal payments in at least 90 days or more
*   Interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement
*   Payments have been delayed by less than 90 days, but come with high uncertainty or no certainty that the debtor will make payments in the future

> **Warning**
>
> Nonperforming loans can harm a borrower's credit score, making future borrowing more difficult and costly.

## Comparing Nonperforming and Reperforming Loans

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](https://www.investopedia.com/terms/b/bankruptcy.asp) agreement. Such an agreement generally allows the borrower to become current on their debt via a [loan modification program](https://www.investopedia.com/terms/l/loan_modification.asp).

## Real-World Example of a Nonperforming Loan

Consider a borrower who can't pay their loan due to a job loss. After 90 days without payment, the lender marks the loan as nonperforming and will continue to pursue 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 can [negotiate debt forgiveness](https://www.investopedia.com/articles/pf/09/debt-settlement.asp) on nonperforming loans, but this might hurt their credit, making future borrowing harder and more expensive.

## What Happens to Nonperforming Loans?

Nonperforming loans can be sold by banks to other banks or investors. The loan may also become reperforming if the borrower starts making payments again. In other cases, the lender may repossess the borrower's collateral to satisfy the loan balance.

## What Are the Causes of Nonperforming Loans?

Nonperforming loans tend to occur during economic hardships when delinquencies are high. They happen when the borrower fails to make a payment for a long period of time (such as 90 to 180 days).

## Why Do Banks Sell Nonperforming Loans?

Banks may sell nonperforming loans to focus on the loans that bring in money each month. Selling the loans at a discount may be more profitable than trying to collect money from a delinquent borrower.

## Who Buys Nonperforming Loans?

Other banks or [distressed debt investors](https://www.investopedia.com/articles/bonds/08/distressed-debt-hedge-fund.asp) may consider investing in nonperforming loans, as well as real estate investors.

## How Do You Solve a Nonperforming Loan?

Solving a nonperforming loan involves getting back on track with payments. This can be done with a loan modification agreement through the lender.

## The Bottom Line

The number of nonperforming loans tends to rise during economic uncertainty. These loans are the ones where borrowers do not (or cannot) make payments. The loan goes to NPL status if no payment is received for a set period of time (usually 90 or 180 days—depending on the lender).

> **Article Sources**
>
> 1.  Consumer Finance Protection Bureau. "[Are There Laws That Limit What Debt Collectors Can Say or Do](https://www.consumerfinance.gov/ask-cfpb/are-there-laws-that-limit-what-debt-collectors-can-say-or-do-en-329/#:~:text=The%20Fair%20Debt%20Collection%20Practices%20Act%20%28FDCPA%29%20is%20the%20main,Mortgages)?"
>     
> 2.  European Central Bank. "[Guidance to banks on non-performing loans](https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf?b2b48eefa9972f0ca983c8b164b859ac)."
>     
> 3.  European Central Bank. "[ECB sets out its supervisory expectations for new NPLs](https://www.bankingsupervision.europa.eu/press/pr/date/2018/html/ssm.pr180315.en.html)."
>     
> 4.  International Monetary Fund. "[Nonperforming Loan Classification](https://www.imf.org/external/np/sta/fsi/eng/2003/051403bp.pdf)."
>     
> 5.  International Monetary Fund. "[Eighteenth Meeting of the IMF Committee on Balance of Payments Statistics](https://www.imf.org/external/pubs/ft/bop/2005/05-29.pdf)."