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The Performing Paper and how it works

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Loans and borrowing is not nearly as flexible and easy as it seems. It isn’t just about getting your application approved and availing the money, you have ensure that the amount you have borrowed will be flexible and convenient to pay off. If you are counting on luck, chances, or better future prospects, you are taking a gamble and your loan payments may get jeopardized.

A performing loan can be any loan which is being repaid regularly, but the borrowers are not paying back on time or exceeding the specified deadline of the payback schedule. Such instances force the banks or lending institutions to run after each creditor and remind of their defaulted payments.

What is a performing paper or loan?

According to the definition provided by the International Monetary Fund, a loan is considered to be performing in the instance the principal or interest payments have been delayed but have not yet exceeded the 90 day overdue. The interest payments will add up and so will the late payback penalties, however, the bank expects continued paybacks and therefore, it may even relax or delay the interest and penalty payments.

The Federal Financial Institutions Examination Council describes it as a loan that has not been repaid for less than 90 days, and yet, it has not been considered non-accrual or in workout status.

How do banks deal with performing loans?

When borrowers began to regularly delay their payments for a period that is less than 90 days, and each time the bank staff has to remind them, cajole them and track them down in order to make sure the delayed payback payment is received.

Banks classify such borrowers as the ‘high maintenance accounts’, which are basically debts that require a great deal of effort and collective energies to track down the borrowers, reason with them, beseech them and cajole them to make their payments.

Banks identify the payback patterns, and these borrowers are have to be tracked down individually. However, despite the effort and waste of resources, the bank does not write off these as a bad debt or even a non-accrual, because it is expected that the borrower can be cajoled and reasoned with in order to receive the loan payments.

In the instance where the payments have gone delayed and the penalties along with interest rates seem to be touching the skies, banks or lenders decide to relax the overdue and back payments, or even form a new payback schedule or agreement to facilitate the borrower and ensure they receive their payment.

How do performing loans effect borrowers and lender?

A performing loan requires just as much as effort as a non-performing loan, the only difference is that the lender is hopeful of recovering the payment, and borrower eventually pays up.

However, the banks or lending institutions have to spend a great deal of effort and energies on locating their defaulters, talking them into making their payments, or even altering their payment plans to ensure that at least principal amount of the loan is recovered to minimize losses.

The bank also loses the profit that is expected to generate from the interest payments or the late payment penalties, but also, the waste of resources and man power dedicated to tracking down borrowers and cajoling them to pay up is exhausting, unproductive and risky.

The borrowers who purposely delay their payments in order to exploit the weak points of their lending institutions or banks end up casting an unfavourable and negative mark on their credit history and their credibility as a borrower.

It is highly likely that if they exhaust a bank’s resources in tracking them down and pestering them to make their loan payments, the bank will avoid dealing with them in the future.

Moreover, by unnecessarily delaying their payments, or ending up making late loan payments due to lack of financial management or income hazards, leads to the rapid add up of late payment penalties, and interest rates. And there are certain banks that prompt and cajole borrowers to make their payments regardless of their ability to pay the unaffordable and high interest rates or penalties.

How can borrowers and lenders avoid landing performance loans?

If borrowers want to escape the added financial burden or unreliability of performing loans, they need to make sure they afford paying back the loan they have applied for, along with efficiently managing and planning their payback schedules to adequately meet their financial status and income opportunities.

Buyers need to ensure:

·Their loan size is easily affordable and not too huge to pose as a financial risk.

Always remember, the greater the size of your loan, the more difficult it will be to pay it back, and hence, the greater the chances of your loan being classified as a performing loan.

To make sure this doesn’t happen, avoid applying for an exuberantly huge sum, but rather, only the amount you really need and cannot raise yourself.

·Their payback schedule is convenient, easy and supports their financial standing.

Returning a loan will only be easy if you are confident that you will be able to repay the monthly loan payment efficiently without any unnecessary delay.

If your monthly payback for the loan is more than what you earn in a month, the chances of your loan being classified as a performance loan are highly considerable.

Therefore, make sure your loan payback plan is easy and convenient, and you can raise the amount conveniently.

Bankers and lending institutions must:

·Evaluate the credibility and financial standing of the borrower before approving the borrower’s loan application.

It is important that the lender ensures the borrowers is capable and willing to return the principal amount as well as the interest payments in order to recover their debt and avoid non-accruals.

If a loan has been approved on references rather than merit, chances are it will turn into a performance loan, and the bank will have to run after for its payments.