8 signs a borrower would default 

Any lender who plans to run a profitable loan business and not a charity organization must keep a sharp eye out for signs that a borrower might bail on their loan repayments. For digital lenders, spotting these warning signals early can mean the difference between smooth sailing and hitting rough waters. 

That’s why we’ll look into eight major red flags that could spell trouble. Consider this your insider’s guide to navigating lending risks like a pro. So, buckle up and let’s dig into the world of borrower behavior.

Unavailability

You know the feeling when someone’s always playing hide-and-seek? Well, borrowers who are consistently MIA or hard to reach, especially from the get-go, AKA the application process, might be waving red flags. It could mean they’re avoiding conversations about their financial situation, which isn’t reassuring when you’re trying to ensure they can afford the loan they seek and repay right on time.

Inconsistency in information

When a borrower can’t keep their story straight, or their details change every time you chat, it’s like trying to catch smoke with your bare hands. This lack of consistency could be a sign of trouble brewing. Maybe they’re not being entirely upfront about their financial situation, or perhaps they’re struggling to keep track of their affairs, or worse, they’re stealing someone else’s identity. Either way, it’s a warning sign that digging a little deeper might be wise before moving forward with the loan.

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Discrepancy in documentation

If the documents a borrower provides don’t quite add up — like different income figures or conflicting employment history — it could spell trouble. It might mean they’re not being completely transparent about their finances, raising doubts about their ability to manage a loan responsibly.

Irregularities in account statement

Imagine flipping through a prospective borrower’s bank statements and spotting a bunch of strange transactions or signs of round-tripping. These irregularities can hint at financial instability, mismanagement, or foul play, none of which is helpful to your loan business. Therefore, it suggests that any borrower displaying such a sign will likely struggle to keep up with loan repayments.

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Previous loan defaults

Think of loan defaults like déjà vu. The borrower’s been there, done that, and missed the payment deadline. If they’ve defaulted on loans before, it’s like a warning sign flashing bright red. It shows a pattern of financial hiccups and raises doubts about whether they’ll stick to their repayment plan this time.

Payment delays on utility bills

When they’re struggling to pay for essentials like electricity or water on time, it clearly indicates that managing additional loan repayments might be a stretch too far. If they can’t pay the Electricity Distribution Companies (EDC) light bill, it’s hard to tell if they can repay the urgent N10,000 they want to borrow.

High Debt-to-Income ratio

When a borrower’s debt-to-income ratio is high, it’s like trying to fit into a snug shirt after a big meal — uncomfortable and restrictive. A high DTI indicates that they’re already using a significant portion of their income to pay off debts, leaving little room for handling any more loans.

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Quick first-time repayment

Borrowers who repay loans hastily and immediately apply for another could be playing the system. It’s like a game of cat and mouse; they borrow a smaller amount, settle up fast, then borrow a bigger amount and skip town. A quick first-time repayment often suggests they might be trying to play the system, which could mean they will likely default on future loans. They might be paying off loans fast just to qualify for bigger ones, but then they skip out on paying back those larger loans, leaving you to bear the losses.

Spot the signs, prevent defaults

So, there you have it — keeping an eye out for these signs can save you a lot of headaches down the road. By spotting these warning signs early on, you can take steps to protect your business. It’s all about staying sharp and responsive to what borrowers might be signaling. While no system’s perfect, staying vigilant can go a long way in helping you steer clear of potential defaults and keep your losses at a minimum. To learn more about borrowers’ behavior, send us a message at [email protected].