Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Nonperforming Loan

What it is:

A nonperforming loan is a loan that is close to defaulting or is in default.

How it works (Example):

Let's assume Bank XYZ lent $1,000,000 to Company ABC, which much repay the loan in monthly installments of $25,000. Company ABC makes payments on the loan for two years, then encounters cash flow problems and stops making the payments.

Three months go by without a payment from Company ABC. At this point, Bank XYZ has a nonperforming loan. The longer Company ABC goes without making a payment, the less likely it is that Bank XYZ will ever get its money back.

Why it Matters:

Nonperforming loans are the bane of the lending world's existence. The represent debts that are probably not going to be repaid, thus posing cash problems to their lenders. Additionally, banks that have too many nonperforming loans may come under heavy scrutiny from the FDIC, which provides significant incentive to restructure or renegotiate nonperforming loans before they're too far gone to recover any money at all.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...