What is meant by the term non-performing loans and securede loans and how is the difference udn where they arise
Non-Performing Loans (NPLs):
A non-performing loan (NPL) refers to a loan on which the borrower has defaulted or is expected to default. In general, a loan is considered non-performing when payments are outstanding for a specified period of time (often 90 days), although the precise definition may vary depending on country-specific regulations and bank policies.
NPLs can arise due to various factors, including economic downturns, poor original lending practices, or unexpected life events of the borrower such as unemployment, illness or divorce.
Secured Loans:
A secured loan is a loan that is “backed” by an asset or security. If the borrower cannot repay the loan, the lender has the right to sell or collect the security to recover the outstanding amount. Common examples of secured loans are mortgages (where the home serves as collateral) and auto loans (where the car serves as collateral).
The counterpart of secured loans are unsecured loans, where the loan is not secured by any security. Credit cards and personal loans are often unsecured loans. Because they pose more risk to the lender, they typically have higher interest rates than secured loans.
Difference:
The main difference between NPLs and secured loans lies in their status and nature. NPL is a classification term that describes a loan that has defaulted on payments. A secured loan, on the other hand, refers to the structure of a loan where a security or asset is in place to mitigate the lender’s risk. A secured loan can become an NPL if the borrower defaults on payments.
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2023-08-05 11:53:23
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