What Is a Nonaccrual Loan?

Also known as a nonperforming loan or sour loan, a nonaccrual loan is a type of loan that has fallen into arrears. This typically means that the interest assessed on the loan is now past due, and the lender has reason to believe that being able to eventually collect on the remaining loan balance is somewhat doubtful. While circumstances may vary, a nonaccrual loan is usually considered much more likely to go into default.

In terms of accounting, most financial institutions will class any loan situation in which interest has not been paid within the last 90 calendar days as a nonaccrual loan. This actually affects how the institution can account for the payments received on the loan, since after that 90 days the loan is usually considered to be on a cash basis. Not all types of loans can be classed in this manner, especially any loan arrangements in which collateral is held as part of the overall arrangement. This means that a mortgage is usually not eligible for classification as a nonaccrual loan, even if the borrower is a few months behind with the mortgage payments.

The status as a nonaccrual loan remains in place until some further action is taken to either catch up any interest and principal payments that are past due, or the loan is declared to be in default and the lender takes legal action to attempt some amount of recovery from the borrower. In some cases, the borrower may actually be able to roll the balance of the nonaccrual loan into a new loan with a new lender, although this is usually not possible if the credit rating for the borrower is under a certain level. Typically, institutions will attempt to work with the lender to resolve the matter, possibly by setting up an alternative payment schedule that is within the means of the borrower, eventually bringing the loan out of arrears. This solution is not uncommon when the borrower has a long history with the lender and has currently fallen behind owing to either an extended illness or a job loss.

The borrower will want to resolve the nonaccrual loan situation as soon as possible. Doing so will help to minimize negative items on his or her credit reports, and thus prevent damage that would interfere with obtaining credit in the future. By finding ways to either refinance the balance to a more manageable monthly installment or finding a way to catch up on the past due interest payments, the borrower can once again be in good standing, the loan is taken out of a cash basis classification and the loan can continue to be repaid according to terms.