A classified loan, also called a criticized loan, is a loan that has been recognized by the issuer as in danger of defaulting. Financial institutions label loans as classified to monitor potential loss, and there are many ways a borrower’s loan may be deemed as risky to the bank.
Missed Payments or Decreased Salary
Outstanding payments and interest will evidently cause the lender to become cautious toward the borrower because they are showing signs that the loan may have to be written off. A less obvious reason a loan may become classified is if the borrower’s salary suddenly decreases significantly or, in the case of unemployment, completely stops. The borrower is then considered to be risky because they have a lower ratio of debt to income.
Decline in Credit
Another common reason for issuers to label loans as criticized loans is a sudden drop in credit. If a borrower’s credit …