If you’re in the business of lending money, then non-performing loans are going to be something you have to worry about. What are they? How do you protect yourself from them? Here’s everything you need to know about non-performing loans so that your financial situation remains secure and healthy.
What is a Non-Performing Loan?
A non-performing loan is a loan that the borrower has not been able to repay for some time. This can happen for a number of reasons, but often it’s because the borrower has encountered an economic hardship and is having trouble paying back the loan. The lender may be patient and wait for their money back, or they may choose to declare bankruptcy on the loan, forcing an auction and sale of property in order to recoup some of their losses.
How Do Non-Performing Loans Affect Banks?
To better understand how NPLs affect banks, it’s helpful to learn about the difference between performing and non-performing loans. Performing loans are loans that are currently being paid as agreed by both the borrower and the bank; non-performing loans have borrowers who owe more than they can afford, who missed payments or have other issues that make them unable to pay back what they owe on time.
What causes NPLs?
NPLs happen when a customer cannot pay back the loan due to financial distress. This is often related to an unexpected event such as medical debt, job loss, or divorce. If the problem is not solved, it can snowball and lead to more credit problems and even insolvency. People are most at risk of NPLs if they’re struggling with student loans, mortgages, and credit card debt.
Steps To Eliminate Non-Performing Loans
Having non-performing loans on your books can harm the company’s reputation and even threaten its existence since once investors see that you can’t manage even one loan properly, they’ll be hesitant to let you handle their money in the future as well. How to remove non-performing loans from your records? That’s what this article will tell you.
Step 1. Collect Data on Non-performing Assets
As a mortgage lender, you have the ability to remove non-performing loans from your portfolio. This is possible by working with your acquiring bank that holds these assets. You will need data on how much of the value is still outstanding, as well as any loss calculations that were done.
You will also need data on whether or not there are any current payments being made on the loan; these would be considered performing loans. Once you have compiled all of this information and verified it against what is in your records, notify your acquiring bank that you are ready to release these assets for liquidation.
Step 2. Create An Action Plan For Collection Efforts
If you find yourself unable to collect your delinquent accounts, it’s important that you contact the necessary department or individual and set up a plan of action with them. If your client is a homeowner, it would be best to speak with their mortgage company.
Chances are that they will take over the collection efforts on your behalf and bill you based on their fees which is what we call our agency fee structure.
Step 3. Develop Loan Workout Strategies
After analyzing the property, looking at past sales, and obtaining a potential loan balance of $225,000 with a 10% down payment and a 30 year amortization period, you now have the knowledge needed to work out a solution. It is best if this solution can keep all payments current with the exception of one payment that will make up for the past due amount. This will enable you to maintain your positive credit score.
Step 4. Prepare A Foreclosure Memo For The Underlying Property, If Applicable
If the mortgage company forecloses on the property, you may have a chance to buy it back. If this happens, the sale needs to be finalized within 90 days. Talk with your banker about how and when foreclosure will happen and any information you need in order to buy back the property.
Step 5. Determine Marketing Outreach To Meet The Expected Appraisal Values Of These Assets
However, the impact of removing non-performing loans from your records can vary for businesses. This depends on factors such as their number of loans, the percentage of those that are non-performing, and the degree to which it will increase the appraisal values of your other assets. To help you make an informed decision on this step, we have broken down some of these factors below.
Conclusion
Some borrowers struggle with meeting their repayment terms, which may lead to their loan going into default. However, this does not mean that you have to settle for non-performing loans in your portfolio. In fact, there are steps you can take when dealing with a struggling borrower, such as finding the cause of their delinquency and developing an action plan.
With these strategies in place, we can minimize the chance of a loan going into default and experiencing any negative impacts on your portfolio. Check out a wide range of microlending platforms in South Africa.