All over the world, loans are frequently tied to the risk of losing personal items, known as collateral. However, what isn’t commonly known is that not all loans require collateral. While this benefits borrowers, it raises the question: how do lenders handle such risky loans?
When an individual applies for a large loan, lenders typically require collateral. Whether it’s buying a house, purchasing a car, or taking an overdraft, collateral is usually necessary to secure the loan and mitigate risk for the lender.
For smaller loans, however, requesting collateral can be tricky and problematic, as borrowers who typically seek these loans often lack sufficient assets to offer as collateral.
So, how does a lender manage loans without collateral? From Lendsqr’s perspective, loans under N200,000 don’t necessarily require collateral. The cost of securing and maintaining leverage or a legal mortgage on such small amounts can be impractical. Additionally, checking the National Collateral Registry (NCR) for small loans often isn’t worth the effort.
So, the real question is: how do you secure small loans that lack collateral as a lender?
Featured read: What collateral do you need to protect your loan business?
5 ways to secure a loan without collateral
Lending without collateral can be risky, but there are ways to reduce this risk. These methods help ensure borrowers stay responsible and lenders protect their investments. Here are five practical approaches to secure a loan without collateral.
Asset ownership
When financing a small asset, such as a sewing machine, the asset should be purchased under your loan business name. This arrangement remains in place until the borrower has fully repaid the loan. Once the loan is cleared, full asset ownership is transferred to the borrower. This method provides security to the lender while allowing the borrower to use the asset during the repayment period.
Equity contribution
When a borrower applies for an asset finance loan, you can require them to make an equity contribution. This means they deposit a certain percentage of the total loan amount as a form of commitment. For example, if a borrower wants to finance machinery costing N150,000, they might need to contribute N50,000 upfront. This equity contribution reduces the amount the lender needs to finance and instils confidence in the lender. Since the borrower has a financial stake in the asset, they are less likely to default to avoid losing both their initial contribution and the asset itself. This strategy helps lessen risk for the lender and demonstrates the borrower’s commitment to repaying the loan.
Guarantor
Another method for securing loans without collateral is to require borrowers to bring guarantors when applying for certain loan amounts, such as N50,000 and above. It’s necessary to thoroughly vet these guarantors, treating them with the same level of scrutiny as the primary borrowers. The guarantors should have strong and reliable financial histories, as they are responsible for repaying the loan if the original borrower defaults. If a guarantor has a history of financial irresponsibility, they are unlikely to step in when needed, putting the loan at greater risk.
Offline verification
If the loan amount is substantial, it’s also important to verify their online claims through an offline inspection. For instance, when lending to an SME owner seeking financing for their business, it’s advisable to visit their business location. This visit helps verify the business’s operational capacity, financial claims, and other relevant details to ensure the loan’s feasibility and curb potential risks.
Direct debit
Lastly, you must also consider direct debit as a loan repayment method that limits the chances of defaults. Borrowers must be informed from the get-go that they must authorize a direct debit mandate on accounts linked to their Bank Verification Number (BVN). In this way, loan repayments are automatically debited on the due date, making it easy for lenders and borrowers alike.
The bottom line: A Smarter, not harder approach
Collateral-free lending isn’t about blind faith but smarter risk assessment. Combining the strategies we’ve provided above with responsible lending practices creates a win-win: lenders expand their reach, and borrowers get access to the financial tools they need to thrive and fuel their hustle. Features like direct debit and more are available on Lendsqr for the lender who wants to lend collateral-free loans safely. Send us a message at growth@lendsqr.com, and let’s get you started.
