What Is a Slow Loan?

In the financial world, a “slow loan” is a loan that is believed to be on the brink of default. Most of the time, a loan is declared “slow” once borrowers have been late on their payments more than once in a row or have missed a payment period outright. In some places, the term is statutorily defined, but it is generally used as a term of art that lacks a fixed definition. Different industries, companies, and lenders have different rubrics for determining when to call a loan a slow loan.

Slow loans are usually considered liabilities for lenders. Most financial institutions are structured in such a way that they both expect and depend upon regular repayment of loan expenses. Labeling slow loans is a way for institutions to flag potential liabilities so that the risk can be mitigated before it is realized.

Not all slow loans actually end in default. The risk that they might is the real concern. In a normal lending relationship, the lender — usually a bank or other financial institution — makes an agreement with a borrower to lend a certain amount of money subject to an agreed-upon repayment schedule. Most of the time, these payments are made with interest, which is how the arrangement is worthwhile for the lender. Lenders count on regular interest repayments to finance other loans and obligations.

Banks usually anticipate that at least some of their loans will turn into slow loans. This is particularly true for loans to subprime borrowers. A subprime borrower is someone who has generally bad credit and is considered a risk when it comes to repayment.

Most of the time, the decision of whether or not to lend money to someone is based on five main considerations, sometimes called the “five Cs of credit.” These are character, capacity, capital, conditions, and collateral. A bank will sometimes choose to lend money to a subprime borrower despite a poor showing in these “Cs” if the bank can figure out a way to mitigate the risk, which often comes in the form of a higher interest rate. When the borrowers are able to pay, the banks profit handsomely. Should the borrowers fail, the loans fall into the “slow” category.

The precise definition of a slow loan is sometimes difficult to nail down, as much depends on the lending institution. Loan type also matters: a mortgage is different from a car loan, say, or a small cash advance. The United States’ Office of Thrift Supervision (OTS) at one time defined a slow loan specifically as a delinquent home loan, but left the details of delinquency up to the lender. OTS repealed its official definition in 1999, but the phrase still has hold in financial industries throughout the United States, as well as around the world.

Sometimes, any loans that are 30 days past due are considered slow. Others raise the threshold to 60 days, while in still other institutions a loan is not slow until a borrower has made a habit of turning payments in late. In most cases, slow loans are referred to collections agencies. Even if the money is eventually repaid, the consumer credit rating of slow loan borrowers almost always suffers.