Glossary
What is Loan loss provision?
Definition
A loan loss provision is money set aside, and recorded as an expense, to cover loans a lender expects not to recover. It is commonly calculated by applying a rising percentage to each aging bucket. Provisions keep profit and the loan book's value honest before losses become certain.
A simple aging-based matrix might apply 1% to current loans, 5% to loans 1-30 days late, 25% to 31-60, 50% to 61-90, 75% to 91-180 and 100% beyond 180 days. Those rates are only an illustration: regulators, funders and your own loss history set the real ones.
Provisions are held against the portfolio, while a write-off removes a specific loan from the books, usually against a provision already made. Watch provision coverage, meaning provisions divided by portfolio at risk, to see whether losses are adequately covered.
Learn more
Related terms
See LoanTabs handle this in a live loan book. Browse the full lending glossary.
Start Free Trial