What is an NPL and how to invest in one
An NPL is an unpaid loan that the bank sells at a discount. Learn what it is, why banks sell them and how a private investor can buy discounted debt.
The bank sells it to funds and investors to clear its balance sheet, free up capital and reduce reported bad debt. Many NPLs are backed by collateral, typically a mortgage over a property, which sustains their value even if the borrower does not pay. The buyer tries to recover the debt by settling with the borrower, restructuring the loan or enforcing the collateral.
What NPL actually means
NPL stands for Non-Performing Loan: a loan where the borrower has stopped paying instalments, typically for more than 90 days, or that the bank no longer expects to collect under normal terms.
Many NPLs are backed by collateral, for example a mortgage over a property. That collateral is what gives the loan value even if the borrower does not pay: whoever buys the debt can enforce the collateral to recover their money.
That is why, when you look at an NPL, the first question is not how much is owed but which property backs it and what it is worth.
NPL, NPA and distressed debt: terms worth distinguishing
The NPL is the unpaid loan. When the bank enforces the collateral and takes over the property, that asset becomes a REO (Real Estate Owned) or, in accounting terms, an NPA (Non-Performing Asset): no longer debt, but a property on the balance sheet. Distressed debt covers both: loans and assets bought at a discount due to default or difficulty.
| Term | What it is | Debt or property? |
|---|---|---|
| NPL (Non-Performing Loan) | a loan where the borrower has stopped paying, typically for more than 90 days | debt |
| REO (Real Estate Owned) | a property the bank takes over when it enforces the collateral | property on the balance sheet |
| NPA (Non-Performing Asset) | the same awarded asset, in accounting terms | property on the balance sheet |
| Distressed debt | covers both: loans and assets bought at a discount due to default or difficulty | debt and properties |
The NPL market in Spain
After the financial crisis, Spanish banks transferred hundreds of billions of euros in doubtful assets to specialised funds. The credit default rate, published monthly by the Bank of Spain, marks the pulse of how much bad debt is generated. European regulation (the European Banking Authority (EBA) guidelines on managing non-performing exposures and Directive 2021/2167 on credit servicers and purchasers) has organised and opened this market, which was historically the domain of large funds and is now starting to be accessible to the private investor.
Why banks sell their NPLs at a discount
An unpaid loan costs the bank money: it ties up regulatory capital, forces provisions and worsens its ratios. So banks prefer to sell NPL portfolios to funds and investors, even below face value, and clean up their balance sheet.
- They free up capital and reduce reported bad debt.
- They avoid the cost and time of collection or enforcement.
- They turn a problem asset into immediate liquidity.
- The borrower stops payingThe loan goes into default, typically after more than 90 days unpaid.
- The bank marks it doubtfulIt no longer expects to collect under normal terms, and the loan ties up capital and forces provisions.
- Sale at a discountThe bank sells the portfolio to funds and investors below face value to clean up its balance sheet.
- The investor buys the debtThey acquire the loan with its collateral, usually a mortgage over a property, which sustains its value.
- Attempted recoveryThey aim to recover more than they paid by the route that fits the case, with long timelines and a risk of loss.
How you make money with an NPL
The investor buys the debt at a discount and then tries to recover more than they paid. There are several routes, depending on the case.
- An agreement with the borrower to settle for part of the debt.
- Refinancing or restructuring the loan.
- Enforcing the collateral, for example taking over the mortgaged property.
A loan with 100,000 euros outstanding and a mortgage over a flat valued at 120,000 euros is sold for 60,000. The buyer starts with a meaningful cushion between what they pay and the value of the collateral. This is potential, not a guarantee: the outcome depends on the case and carries risk.
What are the risks of investing in NPLs
Investing in debt carries a risk of loss. Recovery can take time, court timelines are long, collateral can be worth less than expected and the borrower may have other charges. That is why analysing each deal before committing is essential.
In the InvertirDeuda catalogue you see NPLs that usually only large funds saw, with the data provided by the fund: the debt, the collateral and the judicial phase. What is missing shows as no data. You decide whether and how to invest, on your own.
Tell me about new assets in my province
New assets enter the catalogue every week: mortgage-backed debt, judicial auctions and foreclosure assignments. We send you the ones in your province, with the judicial stage explained, no account needed.
Frequently asked questions
- What is the difference between an NPL and a normal loan?
- A normal loan is repaid as agreed. An NPL is a loan in default, usually more than 90 days unpaid, that the bank treats as doubtful and often sells at a discount.
- Can a private investor buy NPLs?
- Yes. Although it was historically the domain of funds, today a private investor can access discounted debt deals, especially through assignments and auctions. The hard part is finding the information, which is exactly what the platform provides.
- Is an NPL the same as a judicial auction?
- No. The NPL is the unpaid debt; a judicial auction is one of the ways to recover the collateral when it is enforced. A single NPL may end up in an auction of the property securing it.