7 effective debt collection practices and legal considerations
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7 effective debt collection practices and legal considerations
Last updated May 31, 2026
Dara
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Repayments are the lifeblood of any lending business. As long as lenders get their loans back, there’s money to reinvest in the business and to protect their financial stability. Yet, recovering debts can be a challenging task. In fact, we uncovered why Nigerians don’t pay back their loans.
This has led to affected lenders trying anything and everything to get their money back, including extreme, illegal, and unethical debt collection practices such as threats to customers via calls or SMS, image defamation on social media, and intrusive calls.
Between the frustration of locating defaulting borrowers and the dangerous dance with debt collection laws, it’s no wonder there’s a constant struggle to maintain a balance between recovering your capital and upholding ethical business practices.
Let’s show you the 7 most effective debt collection practices to recover loans on the right side of Johnny Law in Nigeria.
The way you lay your bed, so you’ll lie on it. An effective debt collection strategy for your lending business develops before you even extend your first loan. You need an efficient loan management system in place. .
That being said, first you need to understand that the kind of loan you choose to give will affect the payment method to implement.
Match loan type to the right payment method
Smaller loans might be ideal for direct debit or debit card payments because they offer an easy and automated way for borrowers to repay. It is also suitable because the loan amount is manageable and the repayment period is relatively short.
On the other hand, larger loans (#100,000 and above) often come with higher risk for the lender, so lenders may require collateral to secure the transaction. Thus, allowing the lender to seize the pledged asset(s) if the borrower defaults on the loan.
Consider third-party disbursements for SMEs
Lending to SMEs is very different to lending to individuals. For this set of customers, you want to understand their cash flow journey, especially those just starting out or enterprises that have a history of cash flow ripples. The safest way to secure the transaction is by using a third-party disbursement process.
This means the lender pays the vendor directly on behalf of the customer to ensure the loan goes to the specific business purposes for which it was intended. When the customer diverts funds to other less profitable ventures, it compromises the their ability to repay on time.
A guarantor is legally responsible to fulfill the loan repayment obligations if the borrower defaults. But someone who doesn’t have the capacity to pay, possibly owes loans somewhere else, and is guaranteeing the loan of a serial debtor is probably not the most dependable person.
Manage your asset purchases carefully
When financing assets, they must be well cured meaning you need to be certain of who owns what. Consider lease purchase agreements for asset financing. It is mutually beneficial because you legally own the asset until the very last payment is made, and if the borrower defaults, you can repossess and resell to retrieve some (if not all) of your money.
Because you already have legal ownership, it is faster and easier to reclaim the assets as yours. On the other hand, this method is attractive to borrowers because after making complete payment, the lender transfers ownership of the assets to such borrower, thereby making it more manageable for the borrower’s cash flow.
Outsource your loan collection efforts
Reputable companies like Wonga and Bfree offer assistance with loan recovery including making phone calls, sending emails and SMS, and even talking to your customers.
They may go ahead to help you restructure loans, because they are aware that some people intend to pay but the loan becomes overwhelming, so they might need the deadline extended or terms adjusted. For example, a borrower’s loan may be due in 3 months but because of financial hardship, the repayment terms may be adjusted to 6 months.
Document and keep all your records for legal claims
Contracts, terms of service, loan agreements, amendments to payment schedules or agreed terms – these all need proper storage and easily access.
Detailed records of emails and even text messages provide irrefutable evidence that you fulfilled your obligations to communicate with the borrower. Should a disagreement arise like the customer denying ever receiving them, these documents serve as the foundation to resolve the situation, clearly proving the duties of both parties.
Set clear communication channels early on
Use clear communication channels between you and your customer so that there are open conversations about any potential issues, you can send payment reminders and prevent defaults.
Let’s take a look at some of the legal considerations for debt collection in Nigeria:
Clear documentation and agreements
Make sure there is an offer letter and legal documents that are explicitly clear to customers plainly outlining loan terms, interest rates, repayment schedules, and any applicable fees before they take the loan. Also, get the customer’s signature on all relevant legal documents to confirm their understanding of the terms and conditions, including the consequences if default.
Make sure the customer witnesses and provides written consent to your loan collection methods in case of a default. For example, they agree to direct debit, Global Standing Instruction (GSI), contacting their guarantors or next of kins, and accept the responsibilities of legal fees when you make legal claims against them in case of a default.
The Limitation of Statute Law provides in Section 18 that an action for recovery of debt will be statute-barred if it is not brought on time.This meansif a customer owes you money, there’s a deadline for filing a lawsuit to collect that debt.
In Nigeria, you generally have six years from the date the debt became due to take legal action. If you miss this deadline, you likely lose the right to sue the borrower to recover the money.
Being fair, legal, and professional is not only the right thing to do, it’s also good business sense. When you choose effective debt collection strategies, treat debtors with respect and adhere to the law, you’re more likely to take control the situation and collect what you’re owed.
You’ll also avoid potential legal trouble and protect your reputation. Professionalism inspires trust and cooperation, which can lead to faster resolutions and a smoother debt collection process for everyone involved.
If you have any questions about loan management, send us a message at growth@lendsqr.com and we’ll provide all the information you need.
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