It’s no secret that the lending space is incredibly competitive. With a growing pool of borrowers and lenders, it’s only getting harder to stand out from the crowd. According to a recent report by market research firm, Loan Market Analytics (LMA), there are now over 100 peer-to-peer lending platforms operating in the United States alone, with that number expected to rise as more and more third-party lenders enter the market. The good news is, most of these platforms offer competitive interest rates and flexible repayment options for borrowers looking for alternative funding options. However, there are certain risks that come with borrowing money from a stranger or a bank outside of the usual financial network.
If you’ve recently taken out a mobile loan from an external lender or have had one before and are wondering what could possibly go wrong, we’d love to help! Read on for 6 valid reasons leading to mobile loan default that every lender should know about..
Poor Underwriting Practices
One of the main risks lenders face is that of poor underwriting. This can be either due to novice lenders or unsophisticated borrowers failing to disclose important information as part of their loan application.
A common type of underwriting error is failing to take into account a borrower’s personal financial situation, such as having access to an emergency line of credit or a safety net savings fund. What this means is, if you get your loan approved but suddenly fall on hard times, the lender will not be able to repay you the loan amount you were originally promised because they didn’t factor in that you would need the money before your maturity date.
Another risk is defaulting on a loan when it has been prepaid before its term ends. In this situation, the lender may not have received the full amount from the borrower and must seek legal action in order to recover what was originally owed.
Fraudulent loans are a common issue with peer-to-peer lending. In fact, the rise in fraudulent lending has led to the platform adopting stricter safeguards for lenders and borrowers alike. The most prevalent frauds include identity theft and fake identities.
To protect yourself from these risks, you should always check out your prospective lender through a third party agency like LMA or Better Business Bureau (BBB). This will help to make sure that your loan meets the standards of your required lender’s platform before you commit to it.
Another way to reduce risk is to find a lender who is well known in the market and use their reputation as your security deposit. A lender who has been around for more than three years and has a good track record will have an easier time attracting trustable borrowers.
Limited Repayment Options and Terms
One of the biggest risks in this lending space is that borrowers are often required to set up a repayment plan with specific terms and amounts. This gives lenders a chance to develop their own default risk evaluations. If a borrower defaults on payments, it can lead to wage garnishment, repossession of property, and other financial penalties. There are some loan platforms that offer flexibility in repayment options, but many still require borrowers to accept a certain amount for each repayment period.
Inaccurate Loan Estimations
One common cause of mobile loan default is the inaccuracy of a borrower’s loan estimate. This can happen when borrowers don’t accurately provide their financial information during the pre-approval process. Another reason for this could be that borrowers underestimate their monthly loan payment and overestimate their potential earnings to repay the loan.
The best way to avoid this is by providing an up-to-date financial history to your lender before getting approved for your loan. Additionally, make sure you know your monthly payment and what it will be if you stick with the agreed plan. If you don’t know these things, simply ask your lender!
Provisionality Periods and Lock-In Periods
The provisionality period is the time a borrower will be eligible to repay their loan before interest rates are calculated. For example, if you have a 12-month loan with 3 months of interest-free payments, then your provisionality period would be 9 months (3 months in the first 3-month period after which you must begin paying back the loan). At this point in time, no interest would be charged on the principal balance. If you don’t pay back the principal balance within your 9 month provisionality period, then that remaining principal amount will become due and payable and any accrued interest will also start being collected.
A lock-in period is typically a 90-day grace period where no late fees or finance charges may accrue during the first 90 days of repayment. Some providers may offer shorter lock-in periods to encourage borrowers to make timely repayments while others may offer longer periods of grace to allow borrowers more flexibility.
Lack of Insured Deposit Guarantees
One of the biggest risks with high-risk lending is that you might not be able to get your money back if the borrower defaults. If a lender is offering unsecured loans, they are free to set their own terms and conditions for repayment, which could be difficult to negotiate or unpredictable.
Another risk with mobile loans? The lack of an insured deposit guarantee!
A deposit guarantee ensures that a borrower’s credit score won’t be impacted if they’re unable to pay back their loan. This ensures borrowers have access to funds without losing their credit score. So what’s the problem? Well, a lack of deposit guarantees can lead to more rapid and serious declines in borrowers’ credit scores.
The risks of borrowing money are often overblown, because it is always a case-by-case scenario. Understand what you can afford and how much you need before taking out a loan. If you’re not sure where to start your process, reach out to your lender or ask them for help!
Mobile loans are an attractive option for borrowers because they often offer lower interest rates and flexible repayment terms than traditional bank loans. However, these benefits come with more risk than a traditional bank loan.
1) The borrower may not be able to pay back the loan in full.
Lenders may have the ability to change the terms of the loan if payments are missed or if there are problems with the creditworthiness of the borrower. If a borrower misses more than three months of payments on their loan, lenders will typically terminate that agreement and either pursue legal action against the borrower or stop providing further funding.
2) If a borrower defaults on their mobile loan, they may still owe additional fees.
Some lenders charge additional fees for late payments, returned checks, incomplete applications or defaulted loans that exceed certain limits set by lenders themselves (e.g., $100). These additional fees can be significant and should be factored into your total cost of borrowing when considering whether or not taking out a mobile loan is worth it in comparison to other types of borrowing options like traditional bank loans or home equity lines of credit (HELOCs).