Non-Performing Loans: What They Are and How They Work

What Are Non-Performing Loans?

By Catherine Brock – Updated Dec 14, 2025 at 4:03 PM EST

Key Points

NPLs show a lender's defaulting loans; high NPL ratios predict greater financial risks.
Lenders manage NPLs via collateral seizure, debt restructuring, or selling the debt.
Comparing a bank’s NPL ratio with economic trends helps gauge its risk level.

A non-performing loan (NPL) is a debt that's in default because the borrower hasn't made scheduled payments, usually for 90 days or more. This concept is important to understand for anyone who plans to invest in financial institutions.

Read on to learn what NPLs signify, how lenders manage NPLs, and the ratio you can use to analyze a lender's NPL performance.

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Simple Interest

Money earned or paid only on the initial amount invested or borrowed, without added interest on interest over time.

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Analysts and investors review non-performing and nonaccrual loan balances to assess the overall credit quality of a lender's loan portfolio. A rising tally of non-performing loans signals the potential for more loan charge-offs and less interest income. These trends negatively affect the lender's financial health and can ultimately contribute to business failure.

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About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Truist Financial. The Motley Fool recommends Regions Financial. The Motley Fool has a disclosure policy.