Ethical ways to recover loans

A not-so-fun fact you need to know about running a lending business is that the biggest challenge every Nigerian lender faces is not technology, capital or regulatory constraints, but how to recover loans and the scary fact is that Nigerians don’t pay back their loans. While one might be tempted to sympathize and assume that it is a lack of financial capacity limiting their ability to repay that is the major contributor to this; we beg to differ — a more accurate representation of the issue is that generally, Nigerians are wilfully daring regarding loan repayments.

The average person is not likely to repay a loan when due or at all if they believe they can get away with it.

This has forced many lenders to explore extreme, and sometimes, illegal measures to recover their outstanding loans. We understand the frustration that may tempt lenders to find these less than decent collection methods attractive. But is the hunt for bad actors worth descending into an unethical morass from which your business reputation may never be redeemed?

This begs the question: what should an honest lender do to recover loans?

At Lendsqr, we can tell you from our experience that the work begins before a loan is even offered to a customer. Interesting right?

Here are the ways to increase your protection against harmful borrowing behaviors:

Ensure you use credit bureaus

Are you picturing zeros and Naira signs right now? Yes, we know this is an expensive option — and we hate that too — but this is a very necessary part of your lending process. You have to think about it critically, what will cost you more; a credit bureau check or stacking up bad loans? Ladies and gentlemen, it appears we have a winner. Credit bureau checks are very vital; if someone has defaulted on another platform, chances are you are next on their hit list.

Make use of statements to gauge cash flows and measure capacity

How better to assess a borrower’s capacity to repay a loan than with their transaction history? The numbers tell a whole story. Ensure the money isn’t being round-tripped to create a façade of liquidity and constant cash flow. Statements can also tell you if a borrower’s funds are spread too thin or if they are currently repaying other loans — this is an indication that they may not be able to repay you.

Don’t worry, this is a lawful route and it is done with the customers’ consent. Lendsqr and Mono have partnered to power the next generation of lenders using statements for the loan decisioning process. We highly recommend this.

Ask for a guarantor

If you are a lender booking larger ticket loans, please ask for a guarantor, and ensure you do a credit check and capacity check on the guarantor. After all, if the guarantor is owing someone else, why would they pay you for the loan that they only guaranteed?

Send reminders when the due date for the loan is approaching

This is the time to make use of SMS, email and in-app notifications. You can’t afford to go silent in the days leading up to the repayment date. Do you want the customer to think you have forgotten all about them and their debt?

Don’t overwhelm the customer with messages but remain visible to them. Give gentle nudges; the last thing you want is a customer having selective amnesia on the loan they owe you because you never reached out to them to get it back.

On the due date, get in touch immediately if there has been no repayment attempt

This day is very crucial. We advise phone calls if possible. Borrowers are more likely to repay a loan when due if you’re on their tails. Some of your customers may need more “encouragement” than others to repay their due loans.

After 3 days, call their guarantors

This borrower is starting to make you feel uncomfortable right? Now you have to step up your follow-up game. Guarantors would have given you permission to reach out to them in a situation like this, please use this permission. Call them.

After a week of no repayment, lawyer up!

At this point, it’s time to get your lawyer to write them officially; both borrower and guarantor. Inform them of the breach of contract. Let them understand that there are legal consequences for their actions, or in this case, their inactions. Remember, this is not the time to ease up, if a bad customer thinks they can get away with not paying back a loan, you will be opening your business up to an unsavory variety of bad actors.

This is the time to push …. lawfully of course.

Inform them that they would you are required to report them to credit bureaus and blacklists 

Now they are really just testing your patience, yes?

At this time, their information should be ready for the credit bureaus. Ensure you report them to the 3 national providers in Nigeria — CRC, Credit Registry, and First Central

If you are subscribed to blacklisting services like Karma.ng or Blacklist.ng, report these bad actors.

Play your part in strengthening the ecosystem.

Be sure to include that once they have been reported, this bars them from accessing loans on other platforms that perform credit bureau checks. Let them know just how serious you are.

They should be shaking in their boots by now.

Still no repayment? Time to sue them to small claims court (if you are in Lagos State)

Some customers need the ultimate checkmate. A customer that allows things to escalate to this point fears no one. They’ve probably done this before; fear them and let the law handle this for you.

We recommend this option for tickets that are large enough, and the defaulting customer continues to ignore you.

The road less travelled, while requiring more work upfront, is a more rewarding one. It’s important to maintain an ethical loan recovery process and no matter how tempting it is, do not resort to abusive messages, curses or broadcasting defaulters’ information to the public. Always remember that a borrower’s right to data privacy is not negotiable.