Share of non-performing loans held by banks in the U.S. 1995-2019
What are non-performing loans?
Banks do not expect all the loans they issue to be fully repaid. For this reason, part of the interest rate that they charge is a “risk premium”, a higher interest rate than the expected change in value. Banks generally use the interest rate on U.S. short-term government bonds as the “risk free rate”, then increase that rate based on the borrower’s credit score.
Loans and delinquency
Non-performing loans differ by loan types based on collateral. Collateralized loans are loans in which the lender has taken something to ensure repayment. If repayment does not occur, the lender keeps the collateral. A classic example would be taking jewelry to a pawn shop, but the same principle applies to mortgage foreclosures. Loans without collateral differ in that a bank cannot foreclose on student loan debt or a medical procedure.