Common Types of Loan Classifications

Now more than ever, knowledge is power. Understanding the world of loans and credit can be extremely confusing, so take a look at these different types of loan classifications to get to know the difference. Whether researching credit score info or learning the ins and outs of a substandard loan, knowing the difference can make all the difference itself.

Substandard

This type of loan classification falls into the negative category. In other words, it isn’t a loan that passes. A substandard qualifier means that there is a high likelihood of the bank, the lender, sustaining some sort of loss at the end of the day. Loans that fall into this category must have a specific weakness that is highlighted as a justification. It has to be clear why the examiner believes the person being loaned the money will be unable to pay it back. In legal terms, this is referred to as a “well-defined weakness.”

Doubtful

This categorization is a bit self-explanatory. However, this category is still different from that of the substandard loan. A loan that falls into the doubtful category actually has all of the same characteristics of the substandard loan but with the added detail of questionable and uncertain conditions. When a loan is qualified as doubtful, it doesn’t mean that a bank will never collect on it. However, it does indicate less likelihood.

Loss

This third category indicates a loan of so little value that it is no longer even considered a bankable asset. When a loan is qualified in this way, experts say that it doesn’t make much sense to make attempts to recover or salvage value. Similar to a doubtful loan, this does not indicate that a bank will never be able to collect on the loan in any capacity, but it does indicate most of all that the value has diminished almost beyond concern. Knowing these differences can help loan processes significantly.