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CandleFocus Glossary Editor
A nonaccrual loan occurs when an unsecured debt has not been paid for more than 90 days. These types of loans are very common in the lending industry and can be a cause of great concern for lenders. The most obvious implication of a nonaccrual loan is that the expected interest has not yet accrued to the lender; this means that the lender has not received any payments whatsoever towards the loan.
The primary way to handle nonaccrual loans is to work out a repayment plan with the customer. This could include extending the loan period or lowering the monthly payments. By doing so, the loan can be restored to its previous status and the borrower can continue making payments as they were originally supposed to.The repayment plan will most likely require the borrower to pay back all of the missed payments.
In the meantime, the loan will remain in a “nonaccrual status” until all of the overdue payments are collected. This means that the lender can record the missed payments as a loss on their books. For example, if the loan was originally for $10,000 and the borrower has not made any payments over the past 90 days, the lender would have to write off $10,000 as a loss on their books.
In addition to repayment plans and writing off losses, lenders can also require further collateral from the borrower in order to reduce the risk of default. By having more collateral, the lender can recoup more of the unpaid debt in the event of a default.
Overall, nonaccrual loans are a risky form of unsecured debt that can cause serious financial hardship for both the lender and the borrower. Lenders should strive to work with borrowers in order to reach a beneficial resolution before the loan enters nonaccrual status. However, if the payments go unpaid for more than 90 days, lenders should have protocols in place to handle the situation, such as offering repayment plans, writing off losses, and demanding further collateral. By taking these steps, lenders can reduce the potential for default and ensure that their loan portfolio remains solvent.
The primary way to handle nonaccrual loans is to work out a repayment plan with the customer. This could include extending the loan period or lowering the monthly payments. By doing so, the loan can be restored to its previous status and the borrower can continue making payments as they were originally supposed to.The repayment plan will most likely require the borrower to pay back all of the missed payments.
In the meantime, the loan will remain in a “nonaccrual status” until all of the overdue payments are collected. This means that the lender can record the missed payments as a loss on their books. For example, if the loan was originally for $10,000 and the borrower has not made any payments over the past 90 days, the lender would have to write off $10,000 as a loss on their books.
In addition to repayment plans and writing off losses, lenders can also require further collateral from the borrower in order to reduce the risk of default. By having more collateral, the lender can recoup more of the unpaid debt in the event of a default.
Overall, nonaccrual loans are a risky form of unsecured debt that can cause serious financial hardship for both the lender and the borrower. Lenders should strive to work with borrowers in order to reach a beneficial resolution before the loan enters nonaccrual status. However, if the payments go unpaid for more than 90 days, lenders should have protocols in place to handle the situation, such as offering repayment plans, writing off losses, and demanding further collateral. By taking these steps, lenders can reduce the potential for default and ensure that their loan portfolio remains solvent.