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What repayment methods are available for lenders to get paid?

September 9, 2024

Eseose Animhiaga

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Lenders face a real headache when ensuring that loans get repaid, and the stakes are high. Imagine pooling all of your resources, seeking out investors, setting up a team, paying handsomely for quality software and finally setting up a lending business, all for your efforts to go down the drain because too many borrowers delay or default. Now you’re scrambling to cover your costs. This is a daily reality for lenders, where the average default rate can be around 5-10%.

According to the International Finance Corporation (IFC), nearly 60% of developing countries’ small and medium-sized enterprises (SMEs) struggle with loan recovery. This is a massive concern for lenders who need reliable ways to ensure they get their money back without chasing borrowers.

Lendsqr understands this challenge, recognizes the importance of diverse payment options, and offers three distinct methods for loan collection. Whether you’re looking for the steady reliability of direct debits, the quick turnaround of debit card payments, or virtual accounts, each method provides a different way to manage and secure loan repayments.

3 ways that lenders get loans repaid: pros and cons

When it comes to repaying loans, lenders have several strategies at their disposal. Each method has its own set of advantages and drawbacks. Let’s look at each approach to help you understand how they work and what to expect.

Virtual accounts

Virtual accounts represent a forward-thinking solution that caters to borrowers’ familiarity with bank transfers. Here’s how they work: Lendsqr sets up a unique virtual account for each borrower. This account isn’t just a fancy number; it’s the go-to place for receiving loan disbursements and making repayments. When it’s time to repay the loan, borrowers simply transfer the required amount into their virtual account. Once the due date hits, the platform takes care of the rest by automatically deducting the repayment. For many Nigerians, bank transfers are a familiar routine, so this method feels intuitive and straightforward. It’s like using a bank account you already know without the fuss of new processes. This familiarity can make managing loans much more straightforward for borrowers who prefer sticking to what they know.

Pros	Cons
Familiarity: Virtual accounts use bank transfer methods that most borrowers are already comfortable with, making the system easy to understand and use.	Manual payments: Borrowers must remember to initiate transfers into their virtual account. Forgetting to do so can lead to missed payments and potential defaults.
Streamlined management: Virtual accounts centralize loan disbursements and collections for Lendsqr lenders, making it easier for lenders to track and manage repayments.	Dependency on technology: Virtual accounts rely on borrowers having access to online or mobile banking, which may not be available to everyone, especially in less connected areas.
Easy tracking: Because each borrower has a unique virtual account, tracking individual repayments and reconciling accounts is simpler.	Potential for errors: Manual transfers are prone to human error. Mistakes in transferring the correct amount or missing a payment deadline can cause complications.

Table 1.0: Pros and Cons of Virtual accounts

Debit cards

When it comes to paying off loans, most borrowers are familiar with using a debit card. It’s like the old standby in the world of payments. It’s easy, quick, and something most people use every day. In Lendsqr, for example, linking a debit card is often the go-to choice for borrowers. During the final steps of applying for a loan, users simply enter their card details, and voilà, everything’s set up and ready to go. It’s incredibly straightforward for borrowers: just pop in your card info, and you’re good to go. This ease of setup is why so many borrowers and lenders prefer it. You don’t need to jump through hoops or deal with complicated procedures. A few clicks, and the loan repayment process is up and running.

Pros	Cons
Easy setup: Linking a debit card is often straightforward. Borrowers just need to enter their card details during the loan application, and they’re good to go.	Card deactivation risks: If a borrower deactivates or replaces their debit card due to financial issues or card expiration, payments can fail, leading to loan default.
Fast transactions: Payments made via debit cards are processed almost instantly, which reduces the time spent waiting for payments.	Transaction costs: Debit card payments can sometimes incur higher processing fees than other methods, like direct debits. These fees can add up, especially for lenders managing large volumes of transactions.
Widely accepted: Debit cards are commonly used and accepted, making them a convenient choice for many borrowers who are already familiar with using their cards for daily transactions.	Security concerns: Storing debit card information can pose a security risk. If not handled properly, it could lead to fraud or unauthorized access to sensitive financial details.
Easy monitoring: Both lenders and borrowers can easily track payments in real-time. This visibility helps manage and reconcile accounts efficiently.	Bank-related issues: If the borrower’s bank system has issues or the card itself has problems, it can affect the payment process.

Table 1.1: Pros and Cons of Debit cards

Direct debit

Direct debit might just be the most straightforward and reliable method out there. Imagine you’ve applied up for a loan and, towards the end of the application process, you simply authorize the lender to pull payments directly from your bank account. It’s like setting up a recurring subscription. You set it once and then forget about it. This method is a staple for many lenders on the Lendsqr platform, and for good reason. People love direct debit for its simplicity and efficiency. You simply enter your bank details and set a payment date, eliminating the need to juggle reminders or manually transfer funds each month. Once you set it up, payments happen automatically, reducing hassle for both borrowers and lenders. Learn more about direct debit.

Featured read: Handle payment collection like a pro with direct debit

Pros	Cons
Automated payments: Once set up, payments are automatically withdrawn from the borrower’s account, reducing the risk of missed payments.	Potential for failed transactions: Payments can fail if the borrower’s account has insufficient funds.
Consistency: Regular, predictable payment schedules help maintain cash flow for lenders and simplify budgeting for borrowers.	Bank account changes: If a borrower changes or closes their bank account, the direct debit arrangement needs to be updated, which can lead to missed payments.
Lower risk of defaults: With automated payments, there’s less chance of accidental non-payment than with manual methods.	Setup and management: Some borrowers might be reluctant to share their bank details or set up direct debit, leading to potential delays or reluctance.
Convenience: Borrowers don’t need to remember to make payments; it’s all handled automatically.	Lack of flexibility: Direct debit payments are fixed, which may not be ideal for borrowers with fluctuating incomes or unexpected financial changes.

Table 1.2: Pros and Cons of Direct debit

The one that fits like a glove

In the end, picking the right loan repayment method is all about finding what works best for you and your borrowers. Whether it’s the convenience of virtual accounts, the ease of debit card payments, or the reliability of direct debits, each option has its strengths and weaknesses.

By understanding these methods, you can better find a solution that keeps your loan business running smoothly. Next time you choose a loan repayment method, you’ll be better equipped to pick the right one. Drop us a message at [email protected], and let’s help you set up the payment method of your choice.