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Also known as non-performing loans, non-performing assets are loans that demonstrate an increased risk of default, usually due to changes in the financial circumstances of the debtor. Typically, any loan that passes the ninety-day mark without any payments made on the outstanding balance will be classified as a non-performing asset. Since lenders depend on the interest generated from these loans as part of their income stream, steps are usually taken to work with the debtor in an attempt to avoid the default from happening.
It is important to note that if a debtor misses the due date for a monthly payment by a few days, this does not constitute a need to declare the loan as a non-performing asset. Many lenders charge late fees that are added onto the amount already due, effectively allowing that late payment to still generate revenue for the recipient of the payment. If the debtor is a few days late making loan payments for several consecutive months, the lender may be somewhat concerned and view the loan as increasing in risk, but not enough to be classed as non-performing.
While there are exceptions, many lenders only classify a loan as a non-performing asset when the debtor has made no attempt to make any type of payments on the debt for a minimum of three consecutive months. For example, if the debtor lost his or her job and was unable to make full payments, but did arrange to make interest payments while looking for work, the lender would still view the loan as producing some type of return. Should the debtor make no effort to work with the lender and arrange some type of payments on either the interest or a portion of the principal, and the dates for three consecutive monthly installments pass with no payments remitted, then the loan is officially a non-performing asset.
Since the next step past declaring a loan to be a non-performing asset is collections and possibly filing a lien on the assets of the debtor, lending institutions will often attempt to work with debtors who are undergoing a temporary financial crisis. Both collection efforts and taking legal action through a court system cost the lender time and money, and are normally not used until all other options have been exhausted. With proper handling and willingness on the parts of both the debtor and the lender, it is often possible to avoid allowing the situation to escalate to a critical level, and permit the relationship to return to a mutually beneficial state.