Which is better for loan repayments: Cards or Direct Debit?

A lender’s worst nightmare is being unable to recover loans. This fear has a compelling hold on lenders that many have resorted to scare tactics, harassment and misusing borrowers’ data to force repayment. More often than not, adopting these unethical methods of loan recovery exposes the dire need for improvement of the lenders’ system for loan recovery.

The use of technology provides lenders with access to effective loan repayment and recovery tools. Consequently, we’ll explore the use of debit cards and direct debit as options for lenders and which is more effective for loan recovery. Paystack and Remita have a proven track record of delivering quality service for processing cards and direct debit transactions; respectively.

How loan recovery with cards works

During the onboarding process, customers are required to bind debit cards as a means of repayment for their loans when due. This allows users to repay their loans manually by choosing their debit card as the preferred payment option. However, this is also applied as a means of recovery, should the borrower default on the loan.

Following this, when a loan is due and no repayment attempt has been made by the customer, the system sends an instruction to the payment provider to trigger a repayment charge on the card, and tries for the full loan amount. If the borrower doesn’t have sufficient funds in the bank account tied to the card to cover the loan at the time, the system recovers what it can and keeps attempting until the loan is fully paid. The amount debited from the customer’s card is used to offset the outstanding balance on the loan.

Pros of cards for loan recovery

• Available for every bank and account type
• Available for every card-holding borrower
• The use of cards can allow for multiple recovery attempts until the loan is fully settled
• Cards as a repayment option is reusable and valid for as long as the loan remains unpaid

Cons of cards for loan recovery

• Lenders’ reach with this option is limited to only borrowers with debit cards. Not every borrower has one
• This option is only viable in the case of a lost, expired or blocked debit cards
• Some borrowers might take advantage of the system and even their block cards to avoid repayment

How loan recovery with direct debit works

Although moneylenders can’t currently benefit from the Global Standing Instruction (GSI) policy which allows financial institutions to debit borrowers’ bank accounts with other banks to settle past due loans with them; the use of direct debit for loan recovery is a sound alternative for lenders.

Direct debit services allow lenders to trigger debits directly from a borrower’s bank account to settle their debt. It requires a mandate in the form of written consent from the borrowers’ to their bank which authorizes the lender to debit their bank account to settle their loan. The mandate also makes provision for more than the amount die on the loan in case of applicable penalty fees for default or failed debit attempts due to insufficient balance. This is carried out through a payments provider like Remita which processes direct debit transactions.

Pros of direct debit for loan recovery

• Effective for high-value transactions
• Unlike cards which can get lost, blocked or expired, bank accounts don’t have these issues

Cons of direct debit for loan recovery

• Not available at every bank e.g First bank doesn’t currently support direct debit
• Not as fast as cards. Usually, direct debit can take up to a few days to process
• Direct debit is not reusable payment option. Once the cumulative amount approved in the mandate is used up, another one has to be gotten and activated by the bank for repayment attempts to proceed.

Get both card and direct debit for loan recovery for free on Lendsqr

Lenders can evaluate both options and choose their preference based on their needs and the market they cater to. Fortunately, both options are available on Lendsqr. All you have to do is sign up for free to get started, where you can also explore and find out about the problem Lendsqr is solving for lenders.