What is a cash loan?
A cash loan is a loan in which interest is recorded as earned when payment is collected. Normally, interest income is accrued on loans because regular payment of principal and interest is assumed. However, in the case of non-performing loans (or loans gone bad), the continuation of payments is questionable. Cash loans are non-performing loans and interest income can only be recorded when the funds are actually received.
Typically, loans are considered to have gone bad when they are in default for 90 days, meaning the borrower has not made any principal or interest repayments for at least that period. Different definitions may apply to consumer loans, residential mortgages and other secured assets.
How a cash loan works
Loans often default because the borrower has been through a rough patch or is strapped for cash and cannot continue making payments. Banks generally consider bad debts because it is unlikely that they will be able to recover them. For this reason, nonperforming loans can present a big problem for a bank. When a bank has many cash loans on its books, its stock price can suffer. Non-performing loans can cause a bank to lose money, and it can mean that a bank has less money available to lend to other customers.
In theory, it is still possible for a debtor to start repaying a non-performing loan again, but in practice this rarely happens and banks have to find another way to collect the loan. How a bank approaches collecting a cash loan will depend on whether or not the loan is collateralized. If a non-performing loan is secured by an asset, such as a car or a house, the bank may attempt to recoup some of its losses by foreclosing or repossessing the asset in question.
Another option that banks have for processing cash loans is to sell them to collection agencies or investors. This is usually done with cash loans that are unsecured by an asset that can be repossessed or foreclosed. The bank may sell non-performing loans at a reduced price to a collection agency, which then owns the debt and may attempt to collect it, perhaps by settling with the debtor an amount less than the amount owed. However, a bank can also form a partnership with a collection agency which can help it to continue paying cash loans in exchange for a percentage of the funds so obtained.
A cash loan is a loan gone bad, so a loan in which interest is recorded as earned only when payment is collected.