In finance, the term loan servicing refers to all actions involved in the administration and amortization of a loan and all related costs across the full loan term.
The life of a loan begins when a borrower is first given a loan by a lender and it ends when the loan has been fully amortized and interest has been paid in full. A loan may be transferred from the original lender to third parties over its lifespan, and these third parties will collect loan repayments and interest.
In every case, some entity must ensure that the borrower repays the loan in keeping with the terms of the loan agreement and that repayments and interest are transferred to lenders. For their part, the borrower must make sure that they meet their amortization and interest payments until they have paid off the loan.
In the case of a revolving loan, the lender must make sure that the borrower makes their interest payments. Borrowers must make sure that interest payments are met.
If a borrower is not able to service their loan – meaning they are unable to meet their amortization and interest payments on time in keeping with the loan agreement – they will have to make an effort to negotiate new terms and conditions with the lender. For example, they may be able to spread amortization payments across a longer loan term so that individual repayments are smaller.
When a borrower defaults on a loan, meaning they miss repayments or interest payments, the lender must either renegotiate the terms and conditions of the loan agreement to make it possible for the borrower to repay the loan, or they must take steps to collect the debt. For example, a lender may file a claim against a delinquent borrower in a municipal debt collection register. Lenders may also sell bad debts to debt collection services for a price well below the value of the loan. Debt collection services specialize in renegotiating loan terms and seizing assets from borrowers in order to ensure that at least part of a debt is repaid.
The entire process involved in the life of a loan is known as loan servicing. However, the term is most widely used in reference to the borrower’s responsibility to repay a loan and meet interest payments.
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