The emergence of digital loans has brought forth its own share of ups and downs. On the bright side, such loans are convenient during emergencies due to their ease of accessibility.
On the other hand, such loans are the very contributors of landing majority of Kenyans in CRB due to loan default.
Below, we look at 6 valid reasons leading to loan defaults that every lender should know.
1. Short loan tenure/repayment duration
One of the most important factors that characterize any given loan app is the duration period required to repay the loan. In short, this can be termed as the deal breaker!
On average, a favorable repayment duration should be at a minimum of 30 days.
Lenders who offer periods of less than that run the risk of borrowers defaulting.
2. High Interest rates
Interest rates a.k.a service fee charges are the profitable aspects of digital loans.
This implies that higher interest rates translate to higher revenues for lenders at the expense of borrowers.
Some lenders charge interest rates of almost double the principle amounts which strain the repayment capabilities of borrowers who eventually default.
3. High/Low loan limits
Loan limits can prove to be two-edged swords.
High loan limits in comparison to low income may lead to eventual default when one’s income is not enough to cover the loan repayment amount upon due date.
Likewise, lower loan limits may force borrowers to seek additional credit from several other apps in-order to accumulate a considerable amount.
Consequently, borrowers end up in a debt cycle which may ultimately lead to default.
4. Loss of Income
This is a no-brainer!
When a borrower loses his/her source of income, loan repayments are not considered top priority in comparison to the survival of meeting the daily basic human needs.
Therefore, the little savings at hand will be used for food, shelter and clothing as opposed to meeting loan obligations.
5. Lack of loan extension features
Generally, loans are disbursed with the expectations to be repaid at a predetermined date.
However, unforeseeable circumstances may lead to deviations of the said loan tenures and as a result a borrower may need to restructure in-order to make repayment at a later date.
While some loan apps offer this option, majority do not and consequently results to massive defaults caused by the inability to extend their loan due dates.
6. Lack of customer service support
For any successful business, customer support is essential. This is no different with digital lending platforms.
Easy access to understanding loan customer service may reduce default margins by a greater percentage through mutual restructuring of loans and offering of grace periods.