What is a Nonperforming Loan?
How Does a Nonperforming Loan Work?
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 Does a Nonperforming Loan Matter?
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.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
You can elect to buy more stock with it, adding to your...Read More →
Present value is one of the most important concepts in finance. Luckily, once you learn a few tricks, you can calculate it easily. All you need...Read More →
In the last piece in this series, we discussed what you need to know to get started analyzing companies. Yet for many investors, it's the more advanced techniques that prove tricky to master....Read More →
George Soros may have made a billion dollars short-selling the pound sterling (earning him the title of "The Man Who Broke the Bank of England"), but what he really wanted to be was a philosopher...Read More →