Past-Due Loan
Definition
A past-due loan, also known as a delinquent loan, is a loan on which the borrower has failed to make the scheduled payment(s). In banking, this mainly refers to loans where the interest or principal repayments are overdue by more than 90 days. When a loan becomes past due, the borrower may face late fees, increased interest rates, and potential negative impacts on their credit score.
Examples
-
Personal Loans:
- John takes a personal loan of $10,000 but fails to make the repayment for three consecutive months. After 90 days, his account is marked as past due, and his lender imposes late fees.
-
Mortgage Loans:
- Sarah has a mortgage where the monthly interest payment is due on the 1st of each month. If she skips payments for three months, her mortgage loan is considered past due, and her lender may initiate foreclosure proceedings after sufficient notice.
-
Auto Loans:
- Mike buys a car with an auto loan but defaults on his monthly payments. Once the payments are more than 90 days late, his auto loan lender might repossess the vehicle.
Frequently Asked Questions (FAQs)
Q1: What happens when a loan becomes past due? A: When a loan becomes past due, the lender may impose late fees, report the delinquency to credit bureaus, increase the interest rate, or take legal action for recovery (such as foreclosure in case of mortgages).
Q2: How can I prevent my loan from becoming past due? A: Ensure timely payments, set up automatic debits, keep track of due dates, and communicate with your lender if you anticipate any difficulties in making payments on time.
Q3: What is the grace period for a loan? A: The grace period is the time frame after the due date during which a borrower can make the payment without facing penalties. For most loans, it is typically 90 days.
Q4: Can a past-due loan affect my credit score? A: Yes, a past-due loan can significantly affect your credit score negatively as it signals to other creditors that you might be a risky borrower.
Q5: Is it possible to negotiate the terms once a loan is past due? A: Yes, some lenders may work with borrowers to restructure the loan, provide hardship plans, or temporarily reduce payments to assist in returning to good standing.
Related Terms
- Foreclosure: The legal process by which a lender can repossess or sell the property used as collateral for a loan when the borrower defaults.
- Delinquency: The state of being late or behind in a payment.
- Default: The failure to repay a loan according to the terms agreed upon with the lender, potentially leading to legal action or asset seizure.
- Credit Score: A numerical rating of a person’s creditworthiness, which is affected by on-time payments, loan completion, and overdue loans.
- Debt Restructuring: A method used by companies with debt issues to avoid default by negotiating new terms with creditors.
Online References
Suggested Books for Further Studies
- “The Principles of Corporate Finance” by Richard A. Brealey and Stewart C. Myers
- “Financial Management: Theory & Practice” by Eugene F. Brigham and Michael C. Ehrhardt
- “Credit Risk Management” by Joetta Colquitt
Accounting Basics: “Past-Due Loan” Fundamentals Quiz
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
