While there are several ways to recover a debt from a defaulter, it is better to prevent it from happening altogether. One of these measures is to make a deep assessment of the people coming to take loans from you. It is possible to tell if someone will default on their loan. This article will uncover 6 signs that shows the person you are about to lend money will not repay the loan.
Knowing if a person would default on a loan is not an exact science. There is no specific way to tell, but there are signs you should watch out for. So when a person approaches your company for a loan, do watch out for these things:
1. Their Credit History
A person’s credit history basically shows how they have used and managed their previous loans. This is how lenders determine whether or not they should give you a loan. This is because the credit history shows the potential borrower’s total debts, number of debts if they have other debts and if they frequently pay their debts on time.
When you check a person’s credit history and it shows that they have defaulted on previous loans or they have a habit of not paying their bills, that is a pretty good sign that they likely won’t pay back their loan.
They are credit bureaus in Nigeria that would provide credit report of individuals, if lenders require them. Some notable ones are CRC Credit bureau, FirstCentral Credit Bureau, Credit Registry Nigeria etc.
2. Their Desperation; No Long-term Plans
Some people have developed a habit of taking new loans with the objective of offsetting another loan. They often do not think of long term solutions for their debt problem. So when they are about to get in trouble for not having money to pay back a debt, they become desperate. They frantically look for the quickest way to get money and quick micro lenders seem to be the best option.
You can read their desperation by how they are impatient with the loan application process. They begin to complain when it seems to be taking too long for them to get the loan. Even when you decline their application or request, they keep coming back to bug you repeatedly. Sometimes when they come back, they may even request for a lesser amount.
These kind of people have a high chance of not paying back when their loan is due.
3. Poor Social Capital; Their Connection With Others
When a potential borrower approaches you and they do not have anyone to stand as a guarantor for them, that is a red flag. If they suggest people and those people decline, then they are not really trust worthy and will most likely default on their loans. This s
Another thing to note is if they do not belong to and are not active in social groups in their community, like churches etc., you will not have any leverage over them and they can easily run away with the loan.
4. Their Spending Habits
Lending institutions check potential borrower’s spending habits through bank statements to know the state of their finances to minimize the risk. Not everyone is disciplined with money. Some people spend money that is meant to be used for something else. They spend excessively and untimely.
If the loan applicant regularly indulges in addictive gambling or excessive partying, a concern is that they might use the loan in that manner too. You would be safer if you decline their loan application.
5. Their Financial Capacity
When you give someone more than they can handle, they will squander it. This is why banks and financial institutions try to assess debt to income ratio before considering giving out a loan. Debt to income ratio is the amount of debt you payback divided by your gross income monthly.
Basically, it answers the question, “If you pay back your loan monthly, how much of your income still remains”? A financially capable individual should have at least 57% of their income left after settling debts.
If what the borrower is asking for is higher than what they make a month, then they are a high default risk.
6. Their Major Life Change
You have to consider if the borrower is about to make a major life change that will involve spending money like getting married or giving birth to a child. You have to find out if they are relocating or changing jobs. If they don’t have a way of proving that they can pay back the loan without delay, you will be better off declining their request.
These are 6 signs that show the person you are about to lend money to will not repay the loan. So be cautious and always watch out for these signs before giving out a loan.
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My name is Emmanuel Ejiga. Content lead of OG Capital
I am a writer. Technical writer, song writer, and sometimes fictional writer.