How to assess loan applications for individual borrowers  

While lending is globally known to be very profitable, after all even in the bad economy of Nigeria, banks routinely deliver superlative returns, the thoughts of Non Performing Loans (NPL) ratios would make any lender worry. The reputation of Nigerians not paying back their loans poses a red flag and emphasizes the need to develop a keen eye for spotting red flags. Loan defaults by retail borrowers can be triggered by many reasons and a thorough assessment of loan applications often carry indicators of the borrower’s capacity and readiness to repay.

Here are a few things to look out for on a loan application

Assessing a loan application is almost a science with tons of algorithms employed by the biggest global lenders… However, smaller lenders without access to these resources can still do an excellent job of basic assessments of loan requests that leads to superior loan portfolios.

Here are a few common sense approaches to loan assessment that can be used within typical small lending operations:

Borrowers’ ID

Attaching a valid means of identification to a loan application is imperative and absolutely non-negotiable. A lender should know who their borrowers are, as well as some basic details about them. You should only accept government-issued ID – driver’s license, international passport, permanent voter’s card (PVC), NIN slip/ card or any other government-issued ID that may be accepted where you operate. Don’t accept temporary ID in the place of the permanent ones and be sure to always verify borrowers’ ID.

While not having a government issued ID is not a crime, loans to borrowers without a standard ID are known to be particularly susceptible to poor performance. Of course, a fake ID is a sure way to know that the loan would never be repaid. The prospective borrower has failed one of the 5 Cs of credit – Character.

Credit history

A borrower’s credit history tells you about where they’ve been in the credit ecosystem and allows you to make inferences about their capacity and character. Character is a key tenet of credit and making recourse to a borrower’s credit history is an effective way to determine such.

Questions to ask of their history include: If they have ever taken a loan before, have they ever defaulted? How many loans have they taken over a period of time? Do they have overlapping loans that seem to be beyond their means of livelihood?

Fortunately, Lendsqr’s lending stack includes integrations with credit bureaus and these checks are done automatically. If the borrower has been flagged for default by credit bureaus, the system automatically declines those loans, based on the parameters set on your decision models and risk acceptance criteria.

Categories of low-risk borrowers lenders should target

Financial information

Assessing this helps you to determine the borrower’s capacity to repay – another key tenet of credit. A competent way to do this is to use bank statements to assess loan applications.  A borrower’s statement of account has tons of overt and subtle information that can predict the loan performance. The statement of account is almost like a DNA or a log book of a borrower’s life, a careful assessment of which can yield nuggets of truth.

How to assess a statement is an entire article to itself but key factors to check and common questions to ask include:

• Do their accounts go into negative balance even when they don’t have overdraft?
• Even if they do have overdraft, what do they use it to do and how often do they tap into it?
• Are they sweeper? Which means once their salary or income comes in, they immediately take it out of the account in cash or transfer, into places where the spend pattern cannot be analyzed?
• Do they have bounced checks?
• How common are questionable expenses such as on betting?
• How much of the income or salary is spent on other loan repayments?

A borrower’s bank statement paints a vivid picture of their financial health and circumstances. Lendsqr has partnered with Mono to let you be able to do this seamlessly.

Employment status

The entire point of loans is that they have to be repaid. This means you need to make sure the borrower has a way to pay you back; often indicated by their employment status.

• Job type: You need to be sure if the type of job the borrower has; is it full-time or on contract basis? Full-time employment implies more stability than contract jobs and if the contract is weak and could be lost any time, this poses a risk to repayment.
• Job history: Is the borrower sticky with jobs or are they more of a drifter; changing jobs frequently? Could they be out of a job by the time the loan is due?
• Industry: You might need to consider the industry/sector where the borrower is employed. Is it seasonal or unstable? Some industries tend to respond more sensitively than others to economic cycles and this makes them more unpredictable especially with layoffs or redundancies.
• Company reputation (if known): What kind of company does the borrower work in? Are they notorious for owing salaries?

Income

Even after being able to assess the circumstances of the borrower’s employment, taking it a step further by analyzing their income gives a more accurate picture of their capacity.

Is the borrower’s income stable or sporadic? This gives you an idea of whether or not the borrower is likely to be able to repay the loan on the due date they agreed to. Predictable and stable income is a better bet for anticipating repayment than sporadic income (no matter how much).

Another factor to consider is the borrower’s debt-to-income ratio (DTI) which tells you the percentage of their income that goes towards servicing debt. The rule of thumb is that this should be capped at 33% to ensure the borrower will be able to pay you back when due.

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There is no one-size-fits-all approach to assessing loan applications for individuals but these are some factors to consider that guide your loan decisioning process and streamline your applicants’ funnel. Lendsqr provides an extensively configurable loan decisioning engine that puts you ahead by automating this process end-to-end. Reach out to us at [email protected] to help you lend smarter.